■J"  "^.w   II  '»'A-'"o'VJK! 


liJ 
145 
P71i4      Plehn   - 


con.l 


Introduction  to 


nub  i  i  c  f  inane  e . 


^ 


Southern  Branch 
of  the 

University  of  California 

Los  Angeles 


Form  L-1 


tow.  \ 


This  book  is  DUE  on  the  last  date  stamped  below 


1  192& 


313  N- 


:.ig 


8Z618  2     HdV 
OCT  8       ]92g 


Form  L-9-15»n-8,'24 


INTRODUCTION   TO   PUBLIC   FINANCE 


THE  MACMILLAN  COMPANY 

NEW  YORK    •    BOSTON   •    CHICAGO    •    DALLAS 
ATLANTA  •    SAN    FRANCISCO 

MACMILLAN  &  CO.,  Limited 

LONDON  •  BOMBAY  •  CALCUTTA 
MELBOURNE 

THE  MACMILLAN  CO.  OF  CANADA,  Ltd, 

TORONTO 


INTRODUCTION 

TO 

PUBLIC    FINANCE 


BY 

CARL   C.    PLEHN,    Ph.D.,    LL.D. 

FLOOD   PROFESSOR   OF   FINANCE   IN   THE   UNIVERSITY   OF   CALIFORNIA 


" Je  ti' impose  rien ;  je  ne propose  meme  rien;  j'' expose" 

DUNOYER 


FOURTH   EDITION 


THE    MACMILLAN   COMPANY 
1 92 1 

All  rights  reserved 


Copyright,  1896,  1909,  1920, 
By  the  MACMILLAN   COMPANY. 


Set  up  and  electrotyped.  Published  August,  1896.  Reprinted 
August,  1897. 

Second  edition,  revised,  May,  1900;  July,  1902;  August,  1904; 
January,  1906. 

Third  edition,  published  September,  1909;  January,  December, 
1911;  April,  I9T3;  June,  1914;  July,  1915;  July,  December, 
1916. 

Fourth  edition,  published  September,  1920. 


r 


I 


I 


^ 


PREFACE   TO   THE    FIRST    EDITION 


This  Introduction  to  Public  Finance  is  intended  to  be  an 
^        elementary  text-book.     It  contains  a  simple  outline  of  those 
things  which  are  necessary  to  prepare  the  student  for  inde- 
pendent research ;    a  brief  discussion  of  the  leading  principles 
*  .     that  are  generally  accepted ;  a  statement  of  unsettled  principles 
"^       with  the  grounds  for  controversy ;    and  sufficient   references 
to  easily  accessible  works  and  sources  to  enable  the  student 
to  form  some  opinion  for  himself.     The  references  that  are 
^       given  are  not  so  much  for  the  purpose  of  sustaining  the  author's 
^       statements,  which  any  advanced  student  or  teacher  can  easily 
^       trace  to  their  sources,  as  to  enable  the  beginner  to  add  to  his 
information  on  points  that  are  of  necessity  briefly  treated  here. 
Both  the  American  and  the  English  systems  of  taxation  are 
badly  in  need  of  reform.     Public  opinion  is  gradually  awakening 
to  this  need.     Financial  questions  are  widely  discussed.     There 
^       can  be  no  doubt  that  the  most  pressing  reforms  of  the  close  of 
^       the  nineteenth  century  are  tax  reforms.     The  rapid  extension 
of  governmental  functions  —  the  invasion  by  the  government 
of  fields  of  activity  that  lie  near  to  the  welfare  of  the  people  — 
has  given  rise  to  great  interest  in  the  financial  side  of  these 
activities.     It  is  hoped  that  this  work  may  be  helpful  in  the 
accomplishment  of  these  needed  reforms. 

The  Introduction  to  Public  Finance  can  be  intelligently 
studied  by  any  person  already  familiar  with  the  general  prin- 
ciples of  Political  Economy.  Technical  details  and  wearisome 
tables  of  statistics  have  been  avoided  wherever  possible.  Abun- 
dant references  to  statistical  compilations  are,  however,  given, 
so  that  such  matters  can  be  readily  looked  up  if  wanted.  The 
countries  whose  financial  systems  ha\c  l^ccn  chiefly  used  to 

V 


vi  PREFACE   TO   THE    FIRST   EDITION 

illustrate  principles  are  England,  Germany,  France,  and  the 
United  States ;  other  countries  have  been  drawn  upon  only 
for  particularly  pertinent  examples.  A  brief  but  complete 
history  of  the  financial  practices  of  the  four  countries  named 
has  been  given.  The  countries  most  extensively  studied  are 
England  and  the  United  States.  Although  the  book  has  been 
written  from  the  point  of  view  of  an  American,  the  author 
ventures  the  hope  that  it  may  not  prove*  the  less  useful  to 
English  students. 

Carl  C.  Plehn. 
Berkeley,  Cal., 
August,  1896. 


PREFACE   TO   THE   THIRD    EDITION 

In  its  third  edition,  this  book  has  been  revised  throughout, 
partly  rewritten,  and  considerably  enlarged.  The  statistics 
and  other  illustrative  data  have  been  brought  down  to  date, 
and  discussions  have  been  introduced  of  some  of  the  more 
important  of  the  fiscal  questions  which  have  come  into  promi- 
nence since  the  first  edition  was  written. 

By  using  the  book  with  his  classes  in  Public  Finance  at  the 
University  of  Cahfornia,  the  author  discovered  many  points 
in  which  he  thought  it  might  be  improved.  He  has,  also, 
gratefully  adopted  many  suggestions  kindly  offered  by  his 
colleagues  who  have  used  the  book  in  other  colleges  and  uni- 
versities. During  the  period  that  has  elapsed  since  the  pubh- 
cation  of  the  first  edition,  the  author  has  had  much  experience 
at  first  hand  with  the  actual  administration  of  public  fiscal 
afifairs.  This  experience  was  gained  both  in  his  home  State, 
Cahfornia,  and  in  the  Philippines.  This  intimate  contact 
with  taxation  in  the  doing  and  in  the  making  has,  on  the  one 
hand,  modified  the  author's  views,  and  on  the  other  hand 
should  have  aided  him  in  his  endeavour  to  make  the  book  more 
useful  to  officers  concerned  with  taxation  and  to  legislators 
and  their  advisers. 

In  addition  to  the  general  revision  outlined  above,  the  follow- 
ing items  may  be  specifically  mentioned :  the  definitions  and 
explanations  intended  to  aid  the  beginner  have  been  sharpened 
and  clarified,  and  many  new  ones  have  been  added  ;  more 
space  is  given  to  French  taxation ;  the  chapter  dealing  with 
the  American  general  property  tax  has  been  entirely  rewritten 
from  a  new  point  of  view  and  very  much  enlarged ;  the  de- 
scription of  that  "  great  engine  of  the  revenue,"  the  British 

vii 


Vlli  PREFACE  TO  THE   THIRD    EDITION 

income  tax,  has  been  revised,  primarily  with  a  view  to  making 
it  more  easily  understood  by  American  readers ;  Henry  George's 
"  single  tax,"  although  still  disapproved,  is  much  more  sympa- 
thetically treated ;  and  inasmuch  as  the  first  edition  seems 
to  have  found  quite  as  many  readers  in  England  as  in  America, 
the  effort  has  been  made  in  the  selection  of  new  material  to 
choose  those  things  which  may  be  of  equal  interest  in  both 
countries. 

Lucerne,  Switzerland, 
August,  1909. 


PREFACE   TO   THE   FOURTH   EDITION 

The  world  moves.  When  I  compare  the  contents  of  this 
edition  with  those  of  the  first  edition  which  was  printed  in  1896, 
I  am  astonished  by  the  extent  and  number  of  the  changes  in 
pubhc  finance  which  have  occurred  in  the  twenty-five  years 
just  passed.  Although  I  have  lived  through  them  and  had 
a  hand  in  their  making  still  their  magnitude  surprises  me.  The 
additions  made  to  the  book  in  three  revisions  record  only  the 
more  momentous  changes  in  governmental  finance.  But  even 
so  the  record  of  new  things  done,  and  of  new  ways  of  doing 
things,  by  government,  is  impressive  indeed.  There  is  ever 
room  for  more  improvement,  but  progress  has  been  made. 

The  list  of  changes  constitutes  in  itself  a  fine  record  of  progress 
and  achievement.  In  the  field  of  taxation  the  following  pages 
record  as  accomplished  facts  reforms  which  twenty-five  years 
ago  were  dreams.  In  the  United  States  the  income  tax  has 
come  into  use,  and  although  it  is  not  yet  fully  fitted  into  its 
place  in  the  fiscal  system  it  is  coming  to  be  better  understood 
and  highly  appreciated.  The  inheritance  tax,  which  was  so 
unimportant  in  1896  as  to  require  only  a  few  pages,  is  now  well- 
nigh  full  grown.  The  old  general  property  tax,  which  in  1896 
seemed  so  hopelessly  antiquated  as  to  be  beyond  reform,  has 
been  remodelled,  curtailed,  and  adapted  to  the  conditions  of 
modern  life.  Its  evils  have  been  trimmed  away  and  it  will, 
unless  all  promises  deceive,  again  occupy  an  honourable  place 
in  the  esteem  of  the  fiscal  authorities.  The  improvements  in 
tax  administration  have  been  as  remarkable  as  the  changes  in 
the  fiscal  system  itself.  The  business  of  taxation  is  attracting 
fine  men  and  as  officers  they  are  making  taxation  a  science. 
Aljovc  all  and  as  paving  the  way  for  the  better  taxes  and  better 

ix 


X  PREFACE   TO   THE   FOURTH  EDITION 

administration  of  the  old  taxes  there  has  come  a  clearer  social 
judgment  on  what  constitutes  justice  in  taxation.  Official 
commissions  and  voluntary  associations  of  taxpayers  and 
officials  are  studying  taxation  and  disseminating  knowledge  of 
correct  principles.  A  body  of  trained  and  experienced  experts 
in  taxation  now  exists  whose  wisdom  is  being  freely  drawn  upon 
by  legislators. 

The  burden  of  taxation  is  light  only  when  the  money  raised 
is  well  spent.  Although  the  amount  of  taxes  being  raised  to-day 
is  far  larger  than  in  1896  the  burden  thereof,  except  for  the 
financial  burden  of  the  war,  is  less.  Governments  are  doing 
many  new  things,  most  of  which  are  good,  and  are  doing  the  old 
things  better.  Educational  facilities  are  better,  more  varied, 
and  although  more  costly,  create  in  each  succeeding  generation 
new  sources  for  meeting  the  cost  of  the  new  methods.  Prisons 
have  changed  or  are  changing  from  punitive  to  curative  in- 
stitutions, and  every  criminal  cured  is  an  economic  asset  instead 
of  a  burden.  The  same  is  true  of  institutions  for  the  care  of 
defectives.  The  mothers'  pension  system  has  greatly  increased 
the  chance  of  making  good  citizens  of  the  half-orphans.  Proper 
provision  for  industrial  accidents  has  spread  the  burden  thereof 
over  the  many  who  can  carry  it  easily  instead  of  allowing  it  to 
fall  with  crushing  weight  on  the  few.  Old  age  pensions  and 
public  servants'  pensions  are  being  transformed  from  doles 
into  rights.  We  are  protected  from  adulterated  foods  and  to  a 
greater  extent  than  before  from  epidemic  diseases.  The  term 
"  public  highway  "  has  ceased  to  mean  the  abstract  privilege 
of  passing  over  a  streak  of  mud,  and  has  a  new  and  concrete 
( ! )  meaning.  Public  utilities  are  being  made  more  and  more 
public  servants.  When  the  world  goes  to  war  it  does  so  more 
efficiently  than  ever  before.  In  every  direction  the  public 
money  is  being  more  wisely  spent  and  our  impatience  with  the 
waste  of  public  money,  which  is  greater, than  ever,  is  in  itself 
proof  of  progress. 

The  book  has  been  extensively  revised  throughout.  Many 
pages  of  dry  theoretical  discussion  have  been  omitted  to  make 
room  for  the  presentation  of  the  actual  taxes  whose  operation 


PREFACE   TO   THE    FOURTH   EDITION  Xl 

it  is  hoped  demonstrates  the  theory  in  a  more  simple  fashion. 
The  discussion  of  tlie  income  tax,  and  of  the  inheritance  tax,  has 
been  completely  rewritten  and  given  very  much  more  space, 
as  is  becoming  in  view  of  their  present  importance.  The 
chapter  on  the  shifting  and  incidence  of  taxation,  a  topic  of 
burning  interest,  has  been  entirely  recast,  simpHfied,  and  a  new 
and  more  practical  point  of  view  has  been  introduced.  The 
discussion  of  public  expenditure  has  been  recast  to  give  room 
first  for  a  statement  of  the  guiding  principles  and  especially 
for  the  introduction  of  the  new  objects  of  expenditure.  The 
exemplification  of  the  principles  of  war  f  nance  afforded  by  the 
World  War  has  been  examined,  and  the  main  features  of  the  war 
finances  of  different  countries  recorded.  The  new  taxes  tried 
and  proposed,  especially  the  increment  value  land  taxes,  the 
excess  profits  taxes,  and  the  capital  tax,  have  been  discussed. 
Recent  reforms  accomplished  and  proposed  have  been  con- 
sidered.    Facts  and  figures  have  been  brought  down  to  date. 

Columbia  University  in  the  City  of  New  York, 
April,  1920. 


PAGE 


TABLE    OF    CONTENTS 

GENERA  L  CONSIDER  A  TIONS 

Section  i.     The  meaning  of  ''Public  Finance." 

Sec.  2.    An  old  discipline.     Adam  Smith's  four  maxims  on  taxation. 

Manu's  maxim. 
Sec.  3.  The  growing  importance  of  public  finance. 
Sec.  4.   Divisions  of  the  subject. 
Sec.  5.   The  classes  of  revenues  and  e.xpenditures.     The  evolutionary 

tendency  to  supply  all  government  costs  by  taxation    .         .       i 

PART   I 
PUBLIC   EXPENDITURE 

CHAPTER   I 

The  Nature  of  the  State  and  Its  Functions 

Section  i  .  Political  science  sets  no  definite  limits  to  the  extension  of 
State  functions.  Sec.  2.  Public  finance  finds  a  limit  in  the  reve- 
nue-yielding strength  of  the  State.  Sec.  3.  Public  expenditure 
in  early  times.  Sec.  4.  Public  expenditure  in  Greece  and  Rome. 
Sec.  5.  Feudal  expenditure  and  the  beginnings  of  modern.  Sec.  6. 
Classification  of  expenditures 11 

CHAPTER  II 

The  Growth  of  Public  Expenditures 

Section  i.   The  growth  of  expenditure  is  rapid.     Sec.  2.   Government 

business  obeys  the  law  of  increasing  cost 22 

CHAPTER  III 

Expenditure  Mainly  for  the  Common  Benefit 

Section  i.  Expenditure  for  general  administration.  Sec.  2.  Ex- 
penditure for  the  legislative  department.  Sec.  3.  Expenditure 
for  public  buildings.  Sec.  4.  Expenditure  for  defence.  Sec.  5. 
Expenditure  for  means  of  transportation.  Sec.  6.  Expenditure 
for    education.       Sec.    7.    Assistance   of   private   industry   and 

commerce 26 

xiii 


PAGE 


xi\-  TABLE  OF  CONTENTS 

CHAPTER  IV 

Expenditure  Mainly  for  the  Benefit  of  Individuals 

Section  i.  Expenditure  for  charities,  mothers'  pensions,  insurance 
against  old  age,  care  of  insane  and  criminal  classes,  hospitals. 
Sec.  2.  Pensions,  civil  and  military.  Sec.  3.  Workmen's  com- 
pensation. Skc.  4.  Bounties  and  "protection."  Sec.  5.  Ex- 
penditure for  the  administration  of  justice.  Sec.  6.  "Better- 
ment" of  property.  Skc.  7.  Expenditure  in  public  industries. 
Sec.  8.     Human  welfare 4° 

PART  II 
PUBLIC  REVENUES 

CHAPTER  I 

The  Character  and  Classification  of  Public  Revenues 

Section  I.  Early  forms  of  revenue.  Sec.  2.  The  growth  of  constitu- 
tionalism results  in  uniformity  of  the  revenue  systems  of  the 
different  countries.  Sec.  3.  Different  States  find  the  same  justi- 
fication of  taxation.  Sec.  4.  Compulsion  is  universal.  Sec.  5. 
Classification  of  revenues,  definitions  of  fees,  taxes,  and  rates. 
Secs.  6  and  7.     Further  considerations  on  classification  .         .       54 

CHAPTER  II 

The  Various  Kinds  of  Taxes,  Fees,  and  Rates;  Definitions 

Section  i.  The  measure  of  taxation  distinguished  from  the  justifica- 
tion; benefit  theory  and  faculty  theory.  Sec.  2.  Difficulties  in 
the  classification  of  taxes.  Sec.  3.  Direct  and  indirect  taxes. 
Sec.  4.  Taxes  on  persons,  property,  and  income.  Sec.  5.  Other 
classifications  of  taxes.  Sec.  6.  Classification  of  fees.  Sec.  7. 
Economic  revenues.  Sec.  8.  Definitions  of  various  terms  used, 
tax  base,  ad  valorem  and  specific,  rate,  proportioned  and  ap- 
portioned taxes,  progression  and  degression,  imports,  customs, 
excises,  tolls,  shifting  and  incidence,  levy,  assessment,  tax  list  or 
roll,  also  diagrams 64 

CHAPTER  in 

The  Tax  System 

Section  I.  All  nations  use  many  different  taxes ;  no  single  tax  feasible, 
the  "single  tax"  of  Henry  George.  Sec.  2.  What,  in  the  opinion 
of  nations,  constitutes  the  ideal  of  correct  or  just  taxation.     The 


TABLE   OF   CONTEXTS  XV 

PAGE 

benefit  theory ;  the  legal  theory  in  the  United  States.  Sec.  3.  The 
faculty  theory;  what  constitutes  faculty.  Sec.  4.  Other 
theories  and  the  theor}'  of  progression  .....       04 

CHAPTER  IV 

The  Development  of  Taxation  before  the  Industrial 

Revolution 

Section  i.  Feudal  dues  commuted,  and  voluntary  contributions  be- 
come taxes.  Sec.  2.  Historj' of  taxation  in  France.  Sec.  3.  His- 
tory of  Crown  taxation  in  England.  Sec.  4.  History  of  local 
taxation  in  England.     Sec.  5.   Colonial  taxation  in  America        .      99 

CHAPTER  V 

The  Development  of  Tax  Systems  from  the  Industrial  Revo- 
lution TO  the  World  War 

Section  i.  The  effect  of  the  industrial  and  political  revolutions. 
Sec.  2.  General  outline.  Sec.  3.  Development  of  taxation  in 
Prussia.  Sec.  4.  In  France.  Sec.  5.  In  England.  Sec.  6.  In 
America.  Sec.  7.  The  National  Tax  Association's  model  tax 
system 114 

CHAPTER  VI 

Excises 

Section  i.  Comparison  of  excises  and  customs;  and  direct  con- 
sumption taxes.  Sec.  2.  Purposes,  principles,  and  kinds  of  the 
excises.  Sec.  3.  Method  of  assessment.  Sec.  4.  Typical  excises. 
Sec.  5.   Proper  field  for  excises 134 

CHAPTER  VII 

Customs  Duties 

Sections  i  and  2.  Customs  duties  defined.  Secs.  3  and  4.  The  pur- 
poses of  customs  duties,  both  fiscal  and  political.  Protective 
and  revenue  tariffs.  Sec.  5.  The  protective  principle  widely  ap- 
plied. Sec.  6.  The  tax  character  of  protective  duties.  Sec.  7. 
Customs  duties  as  a  source  of  revenue,  smuggling.  Sec.  8.  His- 
tory of  customs  duties  in  England.  Sec.  9.  The  German  customs 
union  and  the  imperial  tariffs.  Sec.  10.  History  of  the  French 
tariff.  Sec.  II.  Tariff  history  of  the  United  States.  The  Tariff 
Commission 144 


XVI  TABLE   OF   CONTENTS 

CHAPTER  VIII 
Property  Taxes 

Part   i.     The  General  Property   Tax.     With  Special  Reference 
to  the   United  States 

PAGE 

Section  i.  The  place  of  the  general  property  tax  in  the  revenue  sys- 
tem. Sec.  2.  The  types  of  the  general  property  tax.  The  New 
England  type.  The  Southern  tjq^e.  The  Pacific  Coast  type. 
Lines  of  developments.  Sec.  3.  The  property  subject  to  this  tax. 
Date  of  assessment.  Definitions  of  "real"  and  "personal" 
property.  Sec.  4.  The  property  exempt  from  this  tax.  Sec.  5. 
The  forms  and  methods  of  assessment,  and  the  valuation  of  the 
property.  Sec.  6.  The  taxation  of  mortgages,  and  of  money  and 
credits  other  than  mortgages.  Sec.  7.  The  taxation  of  corpora- 
tion franchises.  Sec.  8.  The  objections  urged  against  the  general 
property  tax.  Sec.  9.  The  scientific  judgment  on  the  general 
property  tax.     Recent  regeneration  of  the  general  property  tax    .     163 

Part  2.     Special  Property  Taxes 

Sec.  10.  The  land  tax.  Sec.  11.  Building  tax.  Sec.  12.  The  incre- 
ment value  land  tax,  especially  in  Great  Britain.  Sec.  13.  Taxa- 
tion of  capital.  Sec.  14.  Post-war  capital  levies.  Sec.  15.  In- 
heritance tax.  The  diff^erent  kinds  :  probate,  estate,  and  inherit- 
ance taxes.  The  British  death  duties.  Sec.  16.  The  arguments 
for  and  against  inheritance  taxes.  Sec.  17.  Rates  and  classes. 
Frequency  and  insurance.  Sec.  18.  Federal  inheritance  and 
estate  taxes.     An  illustration  of  rates 193 

CHAPTER   IX 

Personal  Taxes:  The  Poll  Tax  and  the  Income  Tax 

Section  i.  Poll  taxes.  Kinds  of  poll  taxes.  Sec.  2.  The  personal 
income  tax.  Nature  of  income.  Distinction  between  income 
and  property,  or  capital.  Capital  value  increments  not  income. 
Stock  dividends.  Annuities.  Gross  and  net  income.  Sec.  3. 
Place  of  income  tax  in  the  tax  system.  Sec.  4.  Prussian  income 
tax,  a  highly  personal  form  of  income  tax.  Sec.  5.  British  prop- 
erty and  income  tax,  a  partly  non-personal  form  of  income  tax. 
The  schedules  and  the  rates.  The  assessment  and  collection. 
Sec.  6.  The  federal  income  taxes  of  the  United  States.  The  consti- 
tutional problem  and  the  sixteenth  amendment.  The  Civil  War 
income  tax.  The  income  tax  of  1894.  The  income  taxes  of  1913, 
1916,  and  1918.  Defects  in  the  law.  Sec.  7.  State  income  taxes 
in  the  United  States;  Wisconsin,  Massachusetts,  and  New  York     220 


TABLE   OF  CONTENTS  XVU 

CHAPTER  X 
War  Profits  and  Excess  Profits  Taxes 

PAGE 

Section  i.  A  new  tax.  Sec.  2.  Normal  and  abnormal  profits. 
Sec.  3.  Historical  matters.  Sec.  4.  The  excess  profits  duty  of 
Great  Britain.  Sec.  5.  The  war  and  excess  profits  tax  of  the 
United  States.  Sec.  6.  Judgment  on  the  excess  profits  tax.  Il- 
lustration of  its  working.     Sec.  7.  Effects  of  an  excess  profits  tax     291 

CHAPTER  XI 

The  Incidence  and  Effects  of  Taxation 

Section  I.  Definition  of  shifting,  incidence,  and  effects.  Sec.  2.  Taxes 
which  it  is  intended  shall  be  shifted  and  those  not  expected  to  be 
shifted.  Incidence  of  poll  taxes.  Sec.  3.  Taxes  on  rent,  interest, 
and  profits.  Sec.  4.  Incidence  of  a  permanent  tax  on  property. 
Capitalisation  and  amortisation.  Sec.  5.  Incidence  of  American 
general  property  tax.  Sec.  6.  Incidence  of  a  personal  income 
tax.  Sec.  7.  Incidence  of  taxes  on  producers.  A  popular  half- 
truth  about  ease  of  shifting.  Sec.  8.  The  incidence  of  taxes  which 
alter  market  conditions.  Illustrations  :  a  tax  on  candy,  on  milk, 
on  a  street  railway.     Sec.  9.  Incidence  of  a  tax  on  gross  sales     .     310 

CHAPTER  XII 

Fees  and  Industrial  Earnings 

Section  i.  Connection  between  fees  and  industrial  earnings ;  develop- 
ment of  fees  into  taxes.  Sec.  2.  Judicial  and  legal  fees.  Sec.  3. 
Administrative  fees.  Sec.  4.  Special  assessments.  Sec.  5.  Postal 
fees.  Sec.  6.  Revenues  from  public  property.  Sec.  7.  Revenue 
from  public  industries 328 

PART   III 

PUBLIC   INDEBTEDNESS 

CHAPTER   I 

The  Growth  and  Nature  of  Public  Credit 

Section  I.  Size  and  rapid  growth  of  public  debts.  Secs.  2  and  3.  The 
nature  of  credit.  Sec.  4.  Wherein  public  credit  differs  from  pri- 
vate. Sec.  5.  Economic  effects  of  public  borrowing.  Sec.  6. 
Foreign  and  domestic  loans •    34° 


Xvm  TABLE   OF  CONTENTS 

APPENDIX  TO   CHAPTER  I 

PAGE 

Public  Debt  and  the  World  War,  Tables     .        .351 

CHAPTER  II 

Forms  of  Public  Debts 

Section  i.  Paper  money,  accounts,  claims  and  warrants,  treasury 
and  exchequer  bills.  Sec.  2.  Floating  and  funded  debts.  Sec.  3. 
The  kinds  of  funded  debts,  bonds,  stocks,  rentes,  annuities,  lottery 
loans.  Sec.  4.  Should  bonds  be  taxable?  Sec.  5.  Special  pro- 
visions to  enhance  credit.  Sec.  6.  The  rate  of  interest.  Sec.  7. 
Loans  for  productive  enterprises 353 

CHAPTER   III 

Negotiation,  Payment  of  Interest,  Conversion,  and 
Redemption  of  Debts 

Section  i.  Two  chief  methods  of  negotiating  public  loans.  Sec.  2. 
Place  of  payment  of  interest,  and  other  minor  considerations. 
Sec.  3.  Conversion  of  the  debt.  Sec.  4.  Debt  payment  and 
the  sinking  fund  in  England.  Sec.  5.  Debt  payment  and  the 
sinking  fund  in  America.     Sec.  6.    Summary        ....     366 

PART   IV 

FIN  AN  CI  A  L   A  DMINISTRA  TION 

CHAPTER   I 

The  Budget;    Administration  of  Expenditure;    Control  and 

Audit 

Section  i.  Importance  of  sound  methods  of  administration.  Sec.  2. 
History  of  fiscal  administration.  Sec.  3.  The  budget  in  England, 
and  appropriations  in  the  United  States.  Sec.  4.  English  con- 
trol and  audit.  Sec.  5.  Control  and  audit  in  the  United  States. 
Sec.  6.   The  recent  budget  movement  in  the  United  States  .         .     376 

CHAPTER   II 

Collection  of  the  Revenues  ;  Custody  of  the  Funds;    and 
THE  Public  Accounts 

Section  I.  Early  methods  of  collecting  revenues.  Sec.  2.  Collection 
of  customs  duties  and  excises,  j^  Sec.  3.   Assessment  of  direct 


TABLE   OF   CONTENTS  Xlx 

PAGE 

taxes,  "declaration,"  and  equalisation.  Sec.  4.  Convenience  of 
the  contributor  must  be  consulted  in  the  collection  of  taxes. 
Sec.  5.  Transfer  of  the  public  funds  and  custody  of  the  public 
moneys.  Sec.  6.  Public  accounts  in  England  and  America. 
Sec.  7.   "  Funds  of  account " 387 

CHAPTER  III 

Financial  Administration  of  War 

Section  i.  The  "extra-ordinary"  expenses.  Sec.  2.  Increased  rates 
for  old  taxes.  Sec.  3.  New  taxes.  Sec.  4.  The  use  of  credit  in 
time  of  war.  Sec.  5.  Can  war  be  financed  by  taxation  without 
loans?  Inflation.  Sec.  6.  Proportion  of  taxes  to  loans  in  war 
finances.  Theories  of  different  countries.  Sec.  7.  The  basis  of 
credit  in  war  times.  Popular  loans.  Sec.  8.  Aggregate  war  costs 
1914-1919.  Sec.  9.  English  war  finance  1914-1919.  Sec.  10. 
French  war  finance  1914-1919.  Sec.  ii.  German  war  finance 
1914-1919.  Sec.  12.  United  States  war  finance  1917-1919. 
Sec.  13.  Post-war  finance.  Sec.  14.  United  States  war  finance 
in  the  Spanish  war        .........     396 

Brief  Bibliography  for  Supplemental  Reading          ,        .        .    435 
Index 439 


INTRODUCTION  TO  PUBLIC 

FINANCE 

GENERAL   CONSIDERATIONS 

Section  i.  Finance  and  Public  Finance  Defined.  —  Public 
finance  deals  with  the  raising  and  spending  of  government 
funds.  A  government  needs  money  in  much  the  same  way  as 
an  individual  does.  But  a  government  gets  its  money  mostly 
by  taxation,  which  is  a  power  an  individual  may  not  exercise ; 
and  a  government  spends  money  primarily  for  the  good  of 
society  —  for  the  all  of  us  —  while  an  individual  usually  spends 
on  himself  and  on  his  near  of  kin. 

Finance  is  a  broad  term  covering  all  matters  relating  to 
money  and  especially  to  monetary  transactions.  Thus  we 
have  bank  finance,  corporation  finance,  trust  finance,  private 
finance,  individual  finance,  "  high  finance,"  and  public  or 
government  finance.  The  term  financier  calls  to  mind  bankers, 
syndicates,  brokers,  promoters,  and  other  dealers  in  money 
and  in  credit,  as  well  as  Chancellors  of  the  Exchequer  and 
Secretaries  of  the  Treasury.  The  common  element  is  that  they 
all  deal  with  the  funds  or  means  of  payment.  Any  transaction 
interpreted,  measured,  or  recorded  in  money  is  a  financial  trans- 
action. While  the  government  may  coin  money  and  transact 
a  banking  business,  such  activities  are  not  customarily  included 
in  Public  Finance.  That  term  has  come,  by  accepted  usage, 
to  be  confined  to  a  study  of  funds  raised  by  governments  to 
meet  the  costs  of  government. 

Sec.  2.  Age  of  Public  Finance. — ^  The  science  of  public 
finance,  meaning  therel)y  the  orderly  study  and  arrangement 
of  the  facts  and  principles  belonging  to  this  field  of  knowledge, 

B  I 


2  INTRODUCTION  TO  PUBLIC   FINANCE 

is  old.  The  discipline  as  we  now  have  it  began  with  a  group 
of  advisors  (or  with  the  teachings  of  such  advisors)  to  the  ruling 
kings  and  princes  of  the  various  kingdoms,  mostly  in  central 
Europe,  which  were  formed  toward  the  end  of  the  Middle  Ages. 
These  writers  were  called  the  cameralists.  The  term  camera 
meant  chamber  or  cabinet,  and  a  cameralist,  strictly  speaking, 
was  one  who  was  a  member  of  the  king's  cabinet.  Hence  by 
metonymy  a  cameraHst  was  one  who  dealt  with,  studied,  and 
wrote  about  the  duties  and  business  of  the  king's  cabinet 
officers,  among  which,  naturally,  matters  financial  were  of  the 
first  importance.  The  demand  for  cabinet  ofiicers  and  the 
presence  of  many  persons  who  were  ambitious  to  become  such 
afforded  an  opportunity  for  teachers  of,  and  writers  on,  the 
cameralistic  science  or  sciences.  Hence  a  considerable  number 
of  such  teachers  arose,  some  of  whom  enjoyed  high  repute,  and 
deservedly.  They  have  been  regarded  as  the  forerunners  of 
the  poKtical  economists,  and  so,  in  a  sense,  public  finance, 
which  formed  the  greater  part  of  their  studies,  is  older  than  our 
modern  science  of  economics,  with  which  it  is  now  so  closely 
associated  and  so  generally  held  to  be  a  part. 

In  the  days  of  the  camerahsts  taxation  was  not  very  fully 
developed  and  much  of  the  revenue  which  supported  the  rulers 
and  their  governments  was  derived  from  the  royal  or  princely 
domains  consisting  of  cultivated  lands,  rented  to  tenants  or 
peasants,  or  directly  administered,  of  forests  and  of  mines; 
and  from  dues,  rents,  fees,  and  other  charges  not  of  the  nature 
of  taxes.  So  the  studies  of  the  cameralists  had  to  do  with 
many  forms  of  revenue  which  have  now  disappeared  or  shrunk 
in  importance  as  public  revenues.  They,  however,  did  not 
neglect  taxes,  which  were  then  steadily  rising  in  importance. 

Adam  Smith  on  Public  Finance.  —  Adam  Smith  embodied 
in  his  Wealth  of  Nations  (1776)  a  full  discussion  "  of  the  Reve- 
nue of  the  Sovereign  or  Commonwealth,"  covering  first  the 
"  Expences  "  and  then  the  revenues,  and  as  to  the  last  devoted 
by  far  the  greater  part  of  his  attention  to  taxes.  That  he 
could  relegate  the  discussion  of  pubHc  revenues  other  than 
from  taxes  to  a  bare  dozen  of  pages  and  take  four  times  that 


GENERAL   CONSIDEIL\TIONS  3 

space  for  taxes  shows  the  change  that  had  taken  place  since 
the  days  of  the  cameraUsts.  Moreover,  Adam  Smith  devoted 
a  long  chapter  to  the  Public  Debts,  thus  recording  the  begin- 
nings of  an  important,  then  new,  phase  of  public  finance. 
Public  debts  came  in  with  the  rise  of  constitutional  govern- 
ment. In  the  days  of  the  cameralists  it  was  the  ruler,  not  the 
commonwealth,  whose  credit  formed  the  basis  of  any  public 
borrowing. 

Adam  Smith's  treatment  of  pubhc  finance  and  his  views  on 
taxation  in  particular  influenced  greatly  the  course  of  legislation 
and  the  trend  of  thought  on  finance  for  many  a  decade  after 
the  publication  of  his  book,  and  is  still  potent.  As  a  sample 
of  the  character  of  his  work,  as  well  as  because  of  their  pre- 
eminent significance,  we  may  present  his  famous  canons  of 
taxation  here  despite  the  fact  that  they  logically  belong  in 
another  place.  They  are  commonly  called  canons  although 
Smith  called  them  maxims.  The  following  is  an  abridgment 
of  the  canons.  The  full  text  is  to  be  found  in  The  Wealth 
of  Nations,  Book  V,  Chapter  II,  Part  II. 

Adam  Smith's   Four  Maxims  with  Regard  to   Taxes  in 

General 

Equality.  —  "  I.  The  subjects  of  every  state  ought  to  con- 
tribute towards  the  support  of  the  government,  as  nearly  as 
possible,  in  proportion  to  their  respective  abilities ;  that  is,  in 
proportion  to  the  revenue  which  they  respectively  enjoy  under 
the  protection  of  the  state."  By  "  revenue  "  he  means:  rent, 
profits,  and  wages,  which  he  calls  "  the  three  different  sources 
of  private  revenue." 

Certainty.  —  "  II.  The  tax  which  each  individual  is  bound 
to  pay  ought  to  be  certain,  and  not  arbitrary.  The  time  of 
payment,  the  manner  of  payment,  the  quantity  to  be  paid, 
ought  all  to  be  clear  and  plain  to  the  contributor,  and  to  every 
other  person." 

Convenience.  —  "  III.  Every  tax  ought  to  be  levied  at  the 
time  or  in  the  manner  in  which  it  is  most  hkely  to  be  convenient 
for  the  contributor  to  pay  it." 


4  INTRODUCTION  TO  PUBLIC  FINANCE 

Economy.  — ■  "  IV.  Every  tax  ought  to  be  so  contrived  as 
both  to  take  out  and  to  keep  out  of  the  pockets  of  the  people 
as  httle  as  possible,  over  and  above  what  it  brings  into  the  public 
treasury  of  the  state." 

We  also  insert  here,  so  that  it  may  come  early  to  the  reader's 
attention  and  remain  ever  in  his  mind  as  he  proceeds,  a  still 
greater  maxim  written  three  thousand  years  or  more  before 
the  days  of  Adam  Smith,  by  Manu  the  Indian  sage  and  law- 
giver (between  1200  and  1500  B.C.).  Manu,  it  should  be 
explained,  held  that  taxes  should  not  be  levied  on  the  capital 
but  on  the  income  of  the  taxpayers,  because  otherwise  taxation 
would  check  the  productive  use  of  capital  and  lessen  production. 

Manu's  Maxim 

Progression.  —  "Of  the  unequal  partition  of  taxes  the 
necessary  consequence  is  a  greater  quantity  of  suffering  than 
the  same  amount  of  taxes  would  produce,  if  more  equally 
imposed,  because  the  pain  of  the  man  who  pays  too  much  is 
out  of  all  proportion  greater  than  the  pleasure  of  the  man  who 
pays  too  Httle.  To  make  the  burden  of  taxes  equal,  it  should 
be  made  to  press  with  equal  severity  upon  every  individual. 
This  is  not  effected  by  a  mere  numerical  proportion.  The  man 
who  is  taxed  to  the  amount  of  one-tenth,  and  still  more,  the 
man  who  is  taxed  to  the  amount  of  one-fifth  or  one-half  of  an 
income  of  100  rupees  per  annum,  is  taxed  far  more  severely 
than  the  man  who  is  taxed  an  equal  proportion  of  an  income 
of  1000  rupees,  and  to  a  prodigious  bigness  more  severely  than 
the  man  who  is  taxed  an  equal  proportion  of  10,000  rupees  per 
annum."  ^ 

Financial  Studies  Down  to  1892.  —  Since  the  time  of  Adam 
Smith  writings  on  Public  Finance  have  grown  in  volume. ^  In 
Germany  there  were  many  systematic  treatises  covering  the 
whole  field,  public  expenditures,  public  revenues  of  all  kinds 
including  taxation,  public  debts,  and  financial  administration 

1  Burnell  and  Hopkins,  Lectures  on  the  Laws  of  Manu,  p.  394. 

2  An  excellent  brief  account  of  this  literature  appears  in  Bullock,  Selected  Read- 
ings in  Economics,  Chapter  I. 


GENERAL   CONSIDEIL\TIONS  5 

including  the  budget.  Rau,  Wagner,  Roscher,  Cohn,  and 
Eheberg  are  among  those  who  pubUshed  systematic  treatises. 
Schonberg's  Handbuch,  a  collection  of  important  monographs, 
has  a  volume  entirely  devoted  to  the  discussion  of  financial 
legislation.  In  France  and  England  many  writers  have  studied 
taxation,  notably :  de  Parieu,  Paul  Leroy  BeauHeu,  Leon  Say, 
Ricardo,  M'Culloch,  and  other  economists.  But  the  first 
systematic  treatise  on  the  whole  field  in  Enghsh  was  Bastable's 
Public  Finance,  first  edition,  1892. 

Sec.  3.  Government  Expansion.  —  Financial  problems  are 
becoming  ever  more  important,  because  the  functions  of  govern- 
ment have  grown  in  importance  and  in  number.  Our  indus- 
trial, commercial,  and  social  organisation  has  become  more 
and  more  complex,  and  one  consequence  thereof  is  that  it 
requires  better  and  more  government  organisation  to  keep  it 
running  smoothly.  The  more  government  there  is  the  more 
it  costs.  The  more  dense  population  becomes  the  more  vital 
and  numerous  are  the  activities  of  government.  Traffic  pohce 
are  not  needed  at  country  crossroads  but  in  the  great  cities 
they  are  indispensable.  Government  cost  rises  per  capita  from 
year  to  year  and  generally  speaking  is  highest  where  progress 
is  most  marked.  Whether  we  look  with  favor  or  with  mis- 
giving on  the  constant  expansion  of  government  activities  the 
fact  remains  that  there  is  a  constant  expansion  and  conse- 
quently ever  greater  financial  problems. 

Recent  Literature.  — •  Possibly  these  facts  explain  the  great 
recent  increase  in  the  interest  taken  in  pubhc  finance  which 
finds  a  record  in  publications.  In  the  United  States  we  have 
many  writers,  either  of  books  or  of  essays,  among  whom 
are  H.  C.  Adams,  T.  S.  Adams,  Bullock,  Daniels,  Dewey,  Haig, 
Hollander,  and  Seligman,  not  to  mention  a  multitude  of  others 
whose  interest  in  systematic  public  finance  is  great  but  possibly 
secondary  to  some  other  interest.  Notable,  also,  are  the  official 
reports  of  tax  commissioners  and  other  financial  public  officers. 
Of  great  importance  are  the  pubhcations  of  voluntary  associa- 
tions of  taxation  students  and  taxing  officials.  The  pub- 
lished proceedings  of  the  National  Tax  Association  begun  in 


6  INTRODUCTION   TO   PUBLIC   FINANCE 

1897   contain    a   large   amount    of   interesting   and   valuable 
material. 

In  England  intensive  study  has  been  devoted  to  the  theory 
of  taxation,  and  notable  results  have  been  achieved  by  mathe- 
matical methods  of  analysis  to  which  Marshall,  Edgeworth, 
and  others  have  contributed.  There  are  also  EngHsh  scholars 
whose  work  is  descriptive  and  analytical  of  existing  taxes,  like 
Wilson  and  Goschen,  while  the  monumental  work  by  Stamp 
on  British  Incomes  and  Property  requires  special  mention. 

It  would  take  too  much  space  to  list  the  legal  treatises  on 
taxation  in  any  detail.  But  Cooley  and  Judson  should  be 
named  as  perhaps  the  leading  American  jurists  to  discuss 
taxation. 

Sec.  4.  Divisions  of  the  Subject,  Policy.  —  The  subject 
falls  naturally  into  four  parts :  (i)  public  expenditures,  (2)  pub- 
lic revenue,  (3)  public  debts,  (4)  financial  administration. 

Writers  on  pubHc  finance  have  hesitated  to  pass  judgment  on 
questions  of  policy  as  to  what  should  be  done  or  left  undone  by 
government.  Such  questions  as  the  wisdom  of  embarking 
upon  a  system  of  governmental  old  age  pensions,  the  wisdom 
of  compulsory  education,  or  of  government  operation  of  rail- 
roads, are  not  purely  financial  questions.  They  are  questions 
largely  for  the  statesman  to  determine  and  for  students  of 
political  science  or  government  to  discuss.  Our  attitude  on 
the  question  of  prohibition  of  the  sale  of  intoxicating  liquors 
cannot  be  determined  solely  by  consideration  of  the  taxes  lost. 
But  once  a  policy  has  been  determined  upon  and  a  new  activity 
sanctioned  then  the  cost  and  the  best  way  of  meeting  that  cost 
become  questions  of  finance.  In  this  sense  Public  Finance  is 
a  science  dependent  on  other  sciences,  on  economics,  and  on  the 
science  of  government. 

It  is  sometimes  said  that  a  government  decides  first  what  it 
will  spend  and  then  raises  the  money.  This  is  sometimes  taken 
to  mean  that  a  government  regulates  its  income  by  its  expen- 
ditures, a  plan  which  it  would  not,  ordinarily,  be  wise  for  an 
individual  to  attempt  to  follow.  This  statement  can  easily 
be  taken  to  mean  too  much.     In  war  time  the  first  thought  is, 


GENERrVL   CONSIDERATIONS  7 

of  course,  what  must  be  clone,  and  only  afterward  is  the  question 
raised :  What  will  it  cost  and  how  shall  we  raise  the  money  ? 
But  in  ordinary  times  the  cost  of  any  proposed  new  or  expanded 
activity  is  weighed  against  the  advantages.  The  germ  of 
truth  in  the  statement  is  that  public  revenues  and  taxes  can  be 
determined  somewhat  at  will  and  are  not  limited  as  individual 
incomes  often  are  by  conditions  beyond  control.  It  is,  within 
limits,  practically  true  that  legislative  bodies  often  decide  first 
what  they  would  like  to  do  and  then  consider  whether  the 
taxpayers  will  be  complacent  with  the  added  burden  of  taxes. 
But  the  resistance  of  the  taxpayer  is  potent  to  restrain  in  many 
cases. 

It  is  not  always  true  that  where  the  largest  taxes,  large,  that 
is,  per  capita  or  even  in  proportion  to  wealth,  are  levied  the 
burden  of  taxation  is  greatest.  If  the  money  is  wisely  spent 
by  the  government  the  tax  burden  may  be  light,  even  though 
the  expenditures  are  large.  But  the  burden  of  taxes  misspent 
by  bad  government  is  always  heavy  and  as  hard  to  bear  as 
would  be  tribute  levied  by  a  conquering  enemy.  Good  order, 
good  schools,  good  roads,  and  many  other  results  of  good 
government  produce  the  sources  from  which  taxes  can  be  drawn. 

Sec.  5.  The  Classification  of  Expenses  and  Revenues.  —  To 
the  matter  of  classification,  in  particular  of  public  charges, 
writers  on  public  finance  have  directed  much  attention.  A  good 
classification  is  helpful  in  seeing  the  relations  of  things.  In  the 
present  work  the  classification  used  is  that  suggested  by  Pro- 
fessor Cohn  for  all  public  charges,  and  afterwards  developed 
in  a  somewhat  different  way  by  Professor  Seligman.'  The 
charges  made  by  the  government  upon  individuals  are  regarded 
as  varying  in  character  according  as  the  special  benefit  conferred 
upon  the  individual  is  made  the  exact  or  the  partial  measure  of, 
or  is  not  allowed  to  affect  at  all,  the  burden  imposed  upon  him. 

'  Cohn,  Finanswissenschajt,  pp.  104-118,  esp.  pp.  117,  118.  Sclip^man,  Quarterly 
Journal  of  F.conomics,  May,  i8g2  and  i8g5.  Essays  in  Taxation,  Chap.  IX.  Hints 
of  the  same  classifications  are  found  in  Malchus  and  Hoffman.  See,  also,  Tlehn, 
Classification  in  Tulilic  Finance,  Pol.  Sci.  Quar.,  Marcii,  1897,  and  Nicholson, 
Principles  of  Political  Economy,  Vol.  II,  Bk.  VI,  Chap.  IX.  Especially  important 
and  illuminating  is  the  "Appendix,"  beginning  on  page  146  in  Bastable's  3d  edition. 


8  INTRODUCTION  TO   PUBLIC   FINANCE 

The  nature  of  this  classification  may  be  illustrated  by  reference 
to  the  well-known  customs  of  large  athletic  clubs.  For  member- 
ship, and  the  usual  privileges  of  the  club,  each  member  is  assessed 
the  same  sum,  irrespective  of  the  actual  extent  to  which  he  uses 
the  club,  and  without  reference  to  his  ability  to  pay,  that  being 
assumed,  for  this  purpose,  to  be  equal  to  that  of  every  other 
member,  and  certainly  without  reference  to  any  known  ability 
to  pay  more.  This  fee  is  justified  by  the  common  benefit 
conferred.  If,  however,  the  member  makes  use  of  the  dining- 
room,  or  asks  for  special  privileges,  such  as  the  private  use  of 
the  club  quarters,  grounds,  boats,  appliances,  etc.,  he  pays  an 
additional  sum,  measured,  generally  speaking,  by  the  special 
benefit  conferred  upon  him.  Again,  if  the  club  is  in  debt,  or 
proposes  to  enlarge  its  facilities,  not  infrequently  a  subscription 
paper  is  passed  around  and  each  member  is  urged  to  contribute, 
not  the  same  amount  all  others  have  subscribed,  nor  yet  in 
proportion  to  the  use  he  makes  of  the  club,  but  "  as  much  as  he 
is  able."  And  lastly,  there  are  not  infrequently  cases  where 
poor  but  promising  athletes  have  been  admitted,  in  order  that 
the  club  may  have  the  glory  of  their  prowess,  and  have  been 
excused  from  dues. 

Now  there  is  an  analogy  between  such  a  club  and  the  State 
in  respect  to  the  contributions  demanded,  the  benefits  conferred, 
and  the  method  of  operation.  Generally  speaking,  the  State 
endeavours,  in  collecting  revenues,  to  impose  an  equal  ^  burden 
upon  all  for  the  support  of  those  functions  that  are  regarded 
as  conferring  a  common  benefit,  and  a  special  burden  for  the 
support  of  those  activities  which  confer  a  special  benefit,  and 
under  certain  circumstances  to  increase  the  burden  imposed 
upon  the  very  wealthy,  who  are  regarded  as  able  to  bear  more ; 
and  lastly,  to  tax  all  for  the  support  of  the  poor.  Not  that  the 
State  always  succeeds  in  its  endeavour,  nor  that  all  States 
recognise  equally  the  desirability  of  the  attempt ;  for  in  pubHc 
finance  expediency  necessarily  plays  a  large  part.  But  most 
States  have  come  to  recognise  more  or  less  clearly  these  ideals, 
and  their  policy  can  be  conveniently  summarised  in  this  way. 

1  What  is  meant  by  "equal"  will  be  discussed  later. 


GENEK^L   CONSIDER.\TIONS  9 

Common  and  Special  Benefits.  —  The  various  activities  of 
the  State  can  be  easily  classified,  according  to  the  degree  of 
common  or  special  benefit  they  are  supposed,  by  the  lawmakers, 
to  confer  upon  the  citizens,  or  taxpayers.  The  various  groups 
may  blend  or  shade  into  one  another  at  their  margins,  but 
those  activities  belonging  to  the  centre  of  each  group  are  easily 
recognisable  and  are  fundamentally  different  in  each.  Thus, 
it  is  universally  admitted  that  the  functions  of  the  general 
administrative  and  legislative  departments  are  of  such  a  char- 
acter as  to  give  a  common  benefit,  for  which,  ideally,  every  one 
should  pay  according  to  some  scheme  of  supposed  equality. 
But  at  the  other  extreme  there  are  many  things  done  by  the 
State  which  confer  so  special  a  benefit  as  to  justify  a  special 
charge.  For  example,  when  the  State  carries  a  passenger  or 
a  box  of  freight  over  its  railroad,  or  carries  a  letter,  or  provides 
the  citizens  with  china  or  tobacco,  it  confers  a  special  benefit. 
Between  these  two  extremes  there  are  any  number  of  grades, 
according  as  the  predominant  thought  is  that  of  common  or 
special  benefit,  when  both  ideas  are  present.  But  there  is  one 
more  consideration  that  must  be  introduced.  There  are  a 
certain  number  of  State  activities  which  it  is  in  the  interest  of 
the  whole  to  have  performed,  but  which  accrue  to  the  special 
benefit  of  certain  classes,  who  on  account  of  poverty  are  unable 
to  pay  for  that  benefit;  and  if  the  State  is  to  perform  these 
functions,  it  must  call  upon  the  other  classes  for  assistance, 
excusing  the  poorer.  Theoretically,  the  support  of  the  poor 
and  defective  classes  is  an  activity  conferring  a  common  benefit 
upon  all  the  other  members  of  society,  and  hence  they  are  called 
upon  to  contribute  accordingly.  If  we  consider  it  the  moral 
duty  of  society  as  a  whole  to  help  the  weak,  then  the  relief  of 
the  poor  confers  a  common  benefit.  It  is  the  same  if  we  look 
upon  poor  relief  from  a  less  altruistic  point  of  view,  and  con- 
sider that  society  is  merely  protecting  its  own  interest,  as,  for 
example,  in  isolating  the  feeble-minded,  so  that  they  shall  not 
propagate  their  weakness.  Without  going  into  details  which 
will  receive  attention  later  in  the  book,  it  is  now  clear  that  this 
conce;)tion  provides  a  feasible  way  of  classifying  puljlic  acti\i'ties 


10  INTRODUCTION  TO  PUBLIC   FINANCE 

and  public  revenues.  It  is  a  classification,  which  will,  we  be- 
lieve, help  us  to  get  at  the  economic  features  of  expenditures  and 
reveal  the  justification  of  taxation. 

It  must  not  be  understood  that  the  assignment  of  any  activity 
to  a  particular  group  is  permanent.  Activities  that  were  once 
regarded  as  conferring  special  benefit  —  as,  for  example,  a  large 
part  of  the  administration  of  justice  —  come  in  time  to  be 
regarded  as  of  common  benefit.  Such  changes  sometimes 
proceed  with  rapidity,  and  the  stages  are  not  passed  through 
synchronously  by  all  States.  There  are,  for  example,  many 
cities  which  let  private  individuals  provide  the  water  supply. 
Others  provide  it  themselves,  on  precisely  the  same  terms  as 
individuals  would,  while  others  provide  it  much  as  they  do  other 
special  privileges,  regarded  as  conferring  both  special  and 
common  benefits;  and  very  probably  the  time  is  near  when 
some  large  cities  will  regard  it  quite  as  much  a  matter  of  common 
benefit  to  provide  each  and  every  citizen  with  at  least  a  certain 
amount  of  water,  paying  the  cost  out  of  funds  derived  from  the 
general  taxes,  as  they  now  regard  it  a  matter  of  common  benefit 
to  dispose  of  the  sewage,  a  function  which  was  once  considered 
the  duty  of  each  citizen,  and  is  still  so  regarded  in  some  cities. 
But  however  mutable  our  classes  may  be,  they  are  clearly  dis- 
cernible, and  it  is  generally  only  by  slow  degrees  that  functions 
move  from  one  end  to  the  other  of  the  systematic  grouping. 

While  there  seem  to  be  general  tendencies,  which  transfer  all 
activities  from  the  special  benefit  to  the  common  benefit  plan, 
there  are  a  few  exceptional  cases  where  the  movement  is  the 
other  way.  The  support  of  religion  is  such  an  instance.  Origi- 
nally almost  the  sole  object  of  State  expenditure,  this  has  now, 
after  passing  through  various  ups  and  downs,  come  to  be  re- 
garded as  of  such  special  benefit  that  it  is  being  gradually 
excluded  from  the  sphere  of  the  State,  and  left  to  private  support. 


PART    I 

PUBLIC    EXPENDITURE 

CHAPTER  I 
THE  NATURE   OF  THE   STATE  AND   ITS  FUNCTIONS 

Section  i.  The  State  an  Organism. — The  State  is  the 
centre  of  public  finance.  The  State  requires  money  and  services 
for  the  performance  of  its  functions.  The  first  question  is,  What 
is  the  nature  of  the  State,  and  what  are  its  functions?  To 
answer  this  we  shall  have  to  borrow  a  little  from  political  science. 
The  best  authorities  on  political  science  seem  to  answer  the 
question,  "  What  is  the  State?  "  with  a  more  or  less  expanded 
but  not  essentially  modified  restatement  of  Aristotle's  famous 
dictum :  "  It  is  manifest  that  the  State  is  one  of  the  things  that 
exist  by  nature,  and  that  man  is  by  nature  a  political  animal." 
The  State  is  an  organism  into  which  the  individual  is  born,  and 
through  which  alone  he  can  hope  to  reach  his  highest  develop- 
ment. Upon  its  existence,  and  the  perfection  with  which  it 
performs  its  functions,  depends  the  degree  of  social  organisation 
possible.  The  State  seems  to  be  God-given  to  enable  society 
to  organise  on  a  grand  scale  for  the  accomplishment  of  practical 
ends  far  beyond  the  reach  of  the  individual,  —  ends  upon  which 
the  welfare  of  the  individual  depends.' 

Individualism  and  Socialism  Reconcilable.  —  The  two  oppos- 
ing theories  as  to  the  proper  sphere  of  the  State,  Individualism 
and  Socialism,  stand  for  two  grand  truths.  The  one  for  the 
truth  that  the  individual,  if  he  is  to  accomplish  his  manifest 
destiny,  must  be  allowed  and  assured  room  enough  for  the  free 

^  Cf.  Kidd,  Social  Evolution;  for  detailed  analysis  of  the  nature  of  important 
modem  States  see  Burgess,  Political  Science  and  Comparative  Constitutional  Law. 

II 


12  INTRODUCTION  TO   PUBLIC   FINANCE 

exercise  of  his  powers  so  as  to  develop  them,  and  to  expand. 
Such  individual  development  is  necessary  for  the  advance  of 
society.  The  second  is  that  the  State  affords  the  individual 
the  surest  means  of  obtaining  the  assistance  of  his  fellows,  so 
necessary  to  his  own  complete  manhood.  The  way  of  recon- 
ciling these  two  theories  is  pointed  out  in  the  Christian  doctrine 
that  true  freedom  consists  in  perfect  obedience  to  the  law. 
Anything  short  of  perfect  obedience  to  the  highest  law  is  failure 
to  attain  the  highest  freedom. 

The  constant  intrusion  of  the  State  on  fields  of  activity 
previously  given  to  the  individual  is  a  natural  result  of  the  con- 
stant increase  in  the  separation  of  employments,  necessitating 
more  extensive  organisation.  As  the  individual  becomes  more 
and  more  dependent  for  the  completeness  of  his  own  life  on  his 
fellows  and  their  faithful  performance  of  the  duties  assigned 
to  them,  the  organisation  of  the  State  becomes  correspondingly 
more  perfect.  As  regards  this  increasing  importance  of  or- 
ganisation, the  following  will  fairly  summarise  the  practice  of 
advanced  nations.  It  is  impossible  to  approve  on  a  priori 
grounds  of  every  intrusion  of  the  State  into  fields  hitherto  set 
aside  for  the  individual.  Only  when  such  intrusion  does  not 
lessen  individual  power,  energy,  ambition,  and  ability  to  ad- 
vance, is  it  permitted.  And  only  when  it  promises  definitely 
to  increase  the  importance  of  the  individual,  in  the  long  run,  is  it 
desirable.  The  burden  of  proof  is,  therefore,  in  each  concrete 
case  thrown  upon  the  persons  who  would  have  the  State  ad- 
vance into  new  fields.  There  is  no  absolute  limit  to,  but  only 
a  general  presumption  against,  the  assumption  of  new  functions 
by  the  State. 

Sec.  2.  The  Limit  of  State  Expansion.  —  If  political  science 
cannot  in  the  nature  of  things  give  us  any  definite,  theoretical 
limits  to  the  expansion  or  the  contraction  of  State  functions, 
can  such  limits  be  found  in  public  finance?  If  the  common 
statement  that  "  the  State  regulates  its  income  by  its  expendi- 
ture and  not  its  expenditure  by  its  income  "  is  altogether  true, 
there  can  be  no  limit  set  by  public  finance  to  the  possible  ex- 
pansion of  State  functions.     But  there  are,  as  a  matter  of  fact, 


THE   NATURE  OF  THE   STATE  AND   ITS  FUNCTIONS      13 

many  important  exceptions  recognised.^  Those  exceptions  are : 
(i)  that  statesmen  in  deciding  as  to  the  advisability  of  any 
new  expenditure  necessarily  consider  the  amount  of  burden  it 
will  impose  on  the  taxpayers.  The  expansion  of  municipal 
activities  in  the  last  twenty-five  years  has  been  so  rapid  that 
at  present  any  further  expansion  is,  in  many  instances,  at  least 
temporarily  checked  by  the  difficulties  in  the  way  of  meeting 
the  cost.  (2)  There  are  some  instances  where  for  political 
reasons  income  has  outrun  what  was  regarded  as  wise  expendi- 
ture, and  new  ways  of  spending  have  had  to  be  devised.  This 
is  a  decidedly  more  unfortunate  state  of  affairs  than  the  other, 
for  such  forced  expenditure  seldom  takes  a  wise  direction. 
Witness  the  wholesale  plundering  of  the  United  States  treasury 
for  pensions.  (3)  Expenditures  may  sometimes  rise  very 
rapidly,  and  necessarily  so,  at  a  time  when  it  would  be  extremely 
unwise  to  attempt  to  increase  the  revenues.  At  such  times  the 
practice  of  nations  —  a  practice  that  has  proven  itself  wise 
—  has  been  to  let  expenditure  run  beyond  the  income  and  borrow 
the  difference. 

One  of  the  prime  requisites  of  a  good  system  of  public  revenues 
is  that  the  sums  taken  from  the  people  each  year  in  the  various 
ways  shall  be  as  steady  as  possible.  The  reason  for  this  will 
be  made  clear  under  the  general  consideration  of  revenue.  That 
fact,  however,  forbids  our  determining  the  annual  revenues 
absolutely  by  the  annual  expenditures.  The  general  practice 
of  nations  is  to  increase  expenditure,  (a)  when  it  is  absolutely 
necessary,  {b)  if  not  absolutely  necessary,  when  it  offers  advan- 
tages which  more  than  compensate  for  the  increased  burden 
on  the  revenues.  The  experience  of  nations  has  also  shown, 
that  it  is  universally  better  to  do  the  public  business,  if  expenses 
are  increasing  rapidly,  on  a  deficit  rather  than  on  a  surplus. 
If  expenses  are  for  a  considerable  period  quite  uniform,  the 
usual  policy  is  to  keep  the  revenues,  as  nearly  as  possible,  equal 
to  them,  but  not  in  excess  of  them,  and  when  expenses  can  for 
some  reason  be  lessened,  some  of  the  revenues  may  be  applied 
to  the  amortisation  of  accumulated  deficits.  It  would  seem, 
■Cf.  Bastable,  p.  42;  Wagner,  I,  sec.  11. 


14  INTRODUCTION   TO   PUBLIC   FINANCE 

then,  that  steadiness  of  revenue  is  treated  as  the  more  important 
consideration.  Herein  hes  a  Hmit,  but  not  an  absolutely  fixed 
one,  to  the  expansion  of  expenditure  and  of  State  functions. 

To  sum  up :  the  general  character  of  public  expenditure, 
especially  as  to  whether  imperative  or  not,  as  well  as  to  its 
particular  direction,  will  depend  primarily  upon  considerations 
which  belong  to  political  science.  Its  amount  will  depend  on 
the  revenue-yielding  strength  of  the  State,  and  upon  the  effect 
which  such  expenditure  will  have  thereon.  The  danger  made 
so  much  of  by  some  writers  ^  lest,  revenues  being  obtainable  by 
compulsion,  that  compulsion  be  exercised  for  the  benefit  of 
interested  persons,  who  gain  particularly  by  the  increased 
spending,  is  in  a  democracy  replaced  by  the  corresponding 
danger  lest  too  meagre  supplies  be  granted  by  the  voters  who 
must  themselves  pay  the  larger  part  of  the  revenues,  and  ad- 
visable or  even  necessary  lines  of  expenditure  be  omitted  or 
seriously  curtailed. 

Sec.  3.  Public  Expenditure  in  Early  Times.  — ■  Expendi- 
ture, like  every  other  feature  of  public  finance,  changed  radically 
in  character  and  direction  during  the  eighteenth  century. 
Therefore,  before  proceeding  to  analyse  present  expenditure, 
we  shall  do  well  to  take  a  brief  survey  of  expenditure  before 
that  century.  In  the  early  stages  of  State  life  the  forms  of  prop- 
erty were  few,  public  life  was  identified  with  the  family  and  with 
religious  life.  There  was  little  call  for  definite  public  expendi- 
ture. The  chief  item  was  for  religious  observances,  and  for 
these  purposes  only  was  there  a  distinct  public  treasury.  Foun- 
dations for  the  support  of  religious  observances,  as  seen  in  Greece 
and  Rome,  are  extremely  old.  The  temples  have  their  own 
groves,  lands,  mines,  and  flocks,  receive  contributions,  and 
collect  payments  for  their  services.  Materials  for  the  study 
of  this  period  are  scant.  Services  of  a  public  character  are 
performed  by  all  citizens  as  a  matter  of  course.  In  war  they 
are  the  warriors ;  they  furnish  their  own  arms.  Their  reward 
is  in  the  success  of  their  enterprise.  By  mutual  effort,  or  by 
the  slave  labour  of  conquered  peoples,  they  build  their  fortress- 

1  Roscher,  sec.  109. 


THE   NATURE  OF  THE   STATE  AND   ITS   FUNCTIONS      15 

cities,  ships,  roads,  and  temples.  The  simplicity  of  economic 
life  and  the  absence  of  a  money  economy  forbid  the  rise  of  any 
proper  S}-stem  of  public  revenues.  Taxes  are  levied  on  con- 
quered peoples,  but  the  free  citizen  is  usually  exempt.  There 
is  practically  no  division  of  labour  in  State  matters  which 
would  call  for  a  paid  public  service.  Greece  and  Rome  emerge 
from  these  primitive  forms  with  a  more  compUcated  system  of 
expenditure,  but  with  relatively  little  advance  in  revenues. 

Sec.  4.  Athenian  Expenditure.  —  In  Athens  we  find  a 
highly  developed  system  of  expenditures,  almost  communistic 
in  character,  and  greater  than  that  of  other  nations  of  Greece 
on  account  of  the  sources  upon  which  the  city  treasury  might 
draw  and  the  peculiar  circumstances  in  which  the  city  was 
placed.^  The  expenditure  for  public  buildings  and  public 
works  was  particularly  large,  as  were  the  extravagances  of 
public  festivals  and  sacrifices,  of  donations  to  the  people,  com- 
pensations for  attending  the  assemblies,  and  the  like.  Peculiar 
to  Athens,  among  all  the  nations  of  that  era,  was  the  assistance 
rendered  at  the  public  expense  to  the  poor  and  especially  to 
the  children  of  those  fallen  in  war.  Regular  expenditures  are 
said  to  have  varied  from  400  to  1000  talents,  or  from  $410,400 
to  $1,026,000.  Extraordinary  expenses  in  time  of  war  were 
relatively  small  on  account  of  the  rendition  of  voluntary  ser- 
vices by  the  citizens. 

Expenditure  in  Rome.  —  In  Rome  there  was  no  distinct 
public  budget  in  the  earlier  days  of  the  republic.^  The  public 
wealth  was  not  distinct  from  the  private  wealth  of  the  citizens. 
With  the  increase  of  the  provinces  and  the  receipt  of  tribute 
from  them  came  regular  methods  of  public  expenditure.  The 
items  directly  borne  by  the  State  were  the  cost  of  the  priest- 
hood, of  buildings  and  other  structures  and  roads,  of  the  army, 
of  the  general  administration,  and  of  the  distributions  of  food, 
of  grain  for  the  city  population,  and  donations  of  money,  oil, 
and  wine.     The  army  was  first  paid  in  406  B.C.      But  for  a 

'  The  outline  in  the  text  is  necessarily  very  brief ;  for  a  longer  account  see  Boeckh, 
The  Public  Economy  of  the  Athenians. 

*See  Marquardt,  ROmische  Staalsverwallung,  Bd.  II. 


l6  INTRODUCTION  TO  PUBLIC    FINANCE 

long  time  afterward  the  remuneration  amounted  to  little  more 
than  the  reimbursement  of  expenses.  At  first  the  Emperor  was 
supposed  to  live  from  his  own  private  property,  but  as  he  had 
control  of  all  the  public  revenues,  the  distinction  was  difficult 
to  maintain.     The  later  courts  were  extremely  extravagant. 

Greek,  and  especially  Roman,  expenditure  had  many  fea- 
tures similar  to  modern  expenditure.  In  classic  civilisation, 
division  of  labour  was  sufficiently  developed  to  render  possible 
the  payment  of  those  who  devoted  all  their  time  and  energy 
to  public  affairs.  But  continuity  of  development  is  lacking. 
From  the  fall  of  Rome  to  the  rise  of  feudalism  there  is  a  rever- 
sion to  the  earlier  forms  of  public  life.  Public  expenditure  is 
not  separable  from  private.  The  citizen  serves  the  State  with- 
out remuneration,  and  there  are  no  public  expenses  proper. 

Sec.  5.  Feudal  Expenditure.  —  It  is  the  essence  of  feudalism 
that  all  governmental  functions  are  placed  in  the  hands  of 
officials  who  are  given  the  possession  of  lands  which  yield  the 
necessary  revenues  for  the  execution  of  those  duties.  At  the 
same  time  the  relation  between  these  rulers  and  the  people  is 
such  that  services  can  be  commanded  for  public  purposes  with- 
out distinct  remuneration.  The  undeveloped  condition  of  com- 
merce and  industry  necessitates  that  public  contributions  shall 
be  in  products  and  in  services.  The  chief  duties  of  a  public 
character  that  are  performed  by  these  semi-public  officials  are 
the  organisation  and  leadership  of  military  operations  and  the 
crude  administration  of  justice.  Of  the  administrative  func- 
tions in  our  modern  sense  there  are  scarcely  any.  The  public 
funds  are  so  entirely  under  the  control  of  the  prince  that  he 
comes  to  regard  them  as  his  own.  At  the  same  time  the  various 
subordinate  lords,  who  were  originally  officers  of  the  crown  and 
who  received  lands  for  the  purpose  of  supporting  them  in  their 
offices,  succeed  in  retaining  possession  of  the  lands  and  other 
rights  and  privileges,  although  neglecting  the  duties  for  which 
they  were  given.  As  the  monarchical  State  emerges  from 
feudalism  there  is  the  same  complete  identification  of  the  public 
purse  with  the  private  purse  of  the  monarch  as  there  was  of  the 
State  with  the  person  of  the  monarch.     And  this,  too,  although 


THE   NATURE  OF  THE  STATE  AND   ITS   FUNXTIONS      17 

a  good  share  of  the  revenues  are  now  derived  from  taxation. 
Expenditure  is  for  the  gratification  of  the  prince,  and  so  far  as 
he  sees  that  his  interest  is  the  same  as  that  of  his  people  he 
spends  for  them. 

Expenditures  under  Constitutional  Government.  —  The  ad- 
vance of  constitutional  forms  of  government  is  everywhere 
characterised  by  successful  attempts  on  the  part  of  the  repre- 
sentatives of  the  people,  or  of  those  who  contribute  to  the 
public  purse,  to  get  control  of  the  finances.  Constitutionalism 
advances  just  as  fast  as  it  succeeds  in  these  attempts.  At 
present  the  control  of  the  purse  is  entirely  in  the  hands  of  the 
constitutional  legislative  bodies  in  almost  all  civilised  countries, 
and  the  domains  of  the  prince,  which  were  originally  given  him 
by  the  people  in  order  that  he  might  be  supported  in  proper 
dignity  in  the  performance  of  his  public  duties,  and  were  then 
diverted  by  him  to  his  private  enjoyment,  have  been  regained 
in  many  cases  by  those  who  gave  them,  and  are  in  most  States 
once  more  public  property.  The  expenditure  for  the  support 
of  the  crown  now  becomes  one  of  the  chief  items  on  the  civil 
list.  The  final  establishment  of  constitutional  government  has 
introduced  a  new  criterion  for  judging  public  expenditure.  An 
expenditure  is  no  longer  a  justifiable  one  when  it  gratifies  the 
whim  of  the  ruler  of  the  governing  body,  but  it  must  result  in 
some  clear  benefit  to  the  people  as  a  whole,  or  to  the  nation,  or 
in  a  benefit  that  is  so  regarded ;  otherwise  it  will  not  continu- 
ously meet  with  the  popular  approval  which  is  now  necessary 
to  sanction  every  governmental  action. 

Sec.  6.  Necessary,  Desirable,  or  Superfluous  Expendi- 
tures. —  Many  attempts  have  been  made  to  classify  public 
expenditures,  and  often  with  good  results.  The  most  common 
are  those  which  follow,  more  or  less  closely,  the  usual  economic 
analysis  of  private  expenditure,  according  as  the  wants  satisfied 
are  necessary,  desirable,  or  superfluous.  The  use  of  economic 
terms  in  this  way  is  to  be  commended,  but  as  in  economics,  so 
here,  the  vagueness  and  relativity  of  these  terms  are  very  un- 
satisfactory. Different  writers  do  not  agree  as  to  what  are 
necessaries,  even  for  the  same  State.     After  all,  the  assignment 


l8  INTRODUCTION  TO   PUBLIC   FINANCE 

of  any  particular  expenditure  to  one  or  the  other  of  these  cate- 
gories is  merely  the  expression  of  the  author's  individual  judg- 
ment on  the  expenditure  in  question.'  Professor  Bastable, 
realising  this  difi&culty,  proposes  a  classification  based  on  the 
order  of  historical  rise  of  the  different  functions,  or  perhaps  it 
would  more  nearly  reproduce  his  thought  to  say  that  he  tries  to 
establish  historically  a  sort  of  natural  evolution  or  sequence  of 
public  expenditures.  Such  a  classification  is  useful,  for  the 
purpose  of  historical  treatment,  but  even  there  it  presents  many 
difficulties.  The  difficulties  arise  from  the  fact  that  such  a 
process  merely  substitutes  for  the  author's  judgment,  on  which 
the  older  classifications  rest,  the  judgment  of  the  leaders  of 
national  policy  at  different  times  and  in  different  places  on  the 
same  questions :  namely,  Are  these  expenses  necessary  or  merely 
expedient  ?  He  certainly  gains  much  by  substituting  the  point 
of  view  of  past  statesmen  for  that  of  any  present  person  or 
persons.  But  for  purposes  of  exposition  it  will  be  a  still  greater 
gain  if  we  can  eliminate  the  personal  element  entirely  and  make 
a  classification  that  does  not  depend  upon  the  way  in  which 
the  desirabihty  or  undesirabiHty  of.  the  different  functions  is 
regarded. 

Economic  Classification  of  Civic  Housekeeping.  —  Such  an 
analysis  as  we  are  in  search  of  has  been  suggested  by  Professor 
Cohn,2  which  he  has  well  called  the  "  economic  analysis  of 
ci^ac  housekeeping."  There  are,  according  to  this  suggestion, 
four  groups.  The  first  consists  of  those  functions  which  confer 
so  definite  a  benefit  upon  the  individual,  and  are  so  clearly 
performed  solely  for  the  benefit  of  the  individual,  that  he  would 
naturally  be  expected  to  meet  the  cost  of  them.  The  second 
group  consists  of  those  functions  which  confer  a  common  benefit 
upon  all  members  of  the  State,  of  such  a  character  that  it  can- 
not be  parcelled  out  and  each  portion  definitely  assigned  to  the 
respective  members.  This  group  embraces  the  prime  functions 
of  the  fundamental  institutions  of  the  State.  These  are  the 
two  extremes.  Between  them  are  two  more  groups.  The 
third  consists  of  those  functions  which  confer  a  special  benefit 
»  Cf.  Bastable,  p.  43.  ^  Finanzmssenschaft,  p.  117- 


THE   NATURE   OF  THE   STATE   AND    ITS   FUNCTIONS      19 

that  might  be  separately  assigned  to  particular  persons,  but  in 
which  such  assignment  is  wholly  or  partly  waived,  because 
there  is  also  sufficient  common  benefit  to  justify  making  such 
functions  a  total  or  partial  charge  on  the  general  ability.  Fi- 
nally, a  fourth  group,  which  consists  of  those  functions  that 
confer  a  special  benefit  on  certain  individuals  more  or  less 
unable  to  assist  in  bearing  the  charges,  and  which  are  conse- 
quently treated  as  though  they  conferred  a  common  benefit 
upon  all  the  members  of  society. 

Dropping,  for  the  present,  all  consideration  of  the  ways  in 
which  the  benefit  is  measured,  which  will  be  fully  discussed 
under  the  head  of  revenue,  and  rearranging  the  groups  in  the 
order  of  their  importance,  we  have  the  following  four  classes 
of  expenditures : 

First,  the  largest  and  most  important,  those  which  confer  a 
common  benefit  on  all  citizens. 

Second,  those  which  confer  a  special  benefit  on  certain  classes 
that  is  treated  as  a  common  benefit,  because  of  the  incapacity 
of  these  classes. 

Third,  those  which  confer  both  a  special  benefit  on  certain 
persons  and  a  common  benefit  on  all  the  others. 

Fourth,  those  which  confer  only  a  special  benefit  on  indi- 
viduals. 

Under  the  first  of  these  come  the  general  expenditures  for 
the  support  of  the  constitutional  agencies  of  the  government. 
The  support  of  the  administrative  and  legislative  departments, 
in  almost  all  their  branches,  including  the  diplomatic  corps,  and 
everything  necessary  thereto,  as  public  buildings,  etc.  Here, 
too,  belong  the  support  of  defence  and  the  maintenance  of  in- 
ternal security  and  quiet.  Here  belong,  according  to  modern 
practice,  the  maintenance  of  roads,  although  it  was  once  treated 
as  belonging  to  class  four,  and  passed  through  a  transition  stage 
in  class  three.  Under  this  class  belong  also  the  chief  expenses 
in  connection  with  the  maintenance  of  the  money  circulation, 
although  a  part  of  this  expenditure  is  in  most  countries  to  be 
assigned  to  class  three.^    The  same  is  to  be  said  of  the  expendi- 

»  The  United  States  once  charged  a  seigniorage  of  one-fifth  per  cent. 


20  INTRODUCTION  TO   PUBLIC   FINANCE 

ture  for  education.  Here  belong  the  administrative  control 
and  assistance  of  private  industry  and  commerce. 

Under  class  two  belongs  the  care  of  the  poor  and  the  defec- 
tive. Also  the  support  of  the  pensioned,  unless  the  pensions 
are  such  that  they  may  be  regarded  as  wages  delayed  in  pay- 
ment, in  which  case  they  belong  to  the  first  class. 

Under  class  three  come  the  administration  of  justice,  the 
provision  for  religion  wherever  the  State  has  an  established 
church,  and  general  administration  of  the  postal  service  (some- 
times, however,  this  is  in  class  four),  the  administration  of 
special  rights,  like  patent  rights,  copyrights,  corporation  privi- 
leges, etc. ;  also,  the  recording  of  titles,  etc.,  the  laying  out  and 
grading  of  streets,  building  of  sewers,  etc. ;  so,  also,  the  water- 
supply  in  many  cities,  although  the  provision  for  this  is  rapidly 
undergoing  a  development  that  will  eventually  place  it  in  class 
one. 

To  class  four  belong  almost  all  of  the  great  industries  carried 
on  by  the  State  or  by  cities,  the  monopolies  maintained  by 
them  for  the  benefit  of  their  treasuries,  etc. 

As  will  be  seen  from  remarks  made  above  in  connection  with 
the  assignment  of  certain  of  these  services  to  the  different 
classes,  there  has  been,  and  still  continues,  a  certain  process  of 
evolution  which  may  be  generally  summed  up  as  a  tendency 
for  all  these  expenditures  to  move  from  class  four  to  class  one. 
There  are  many  instances  where  expenditures  now  regarded  as 
naturally  and  unchangeably  belonging  to  class  one  were  regarded 
as  belonging  to  class  four.  When  a  government  assumes  any 
new  industrial  function,  as,  for  example,  supplying  water  to 
the  inhabitants  of  a  city,  that  function  is  usually  assigned  at 
first  to  class  four  and  treated  as  though  conferring  a  special 
benefit  only.  But  it  frequently  comes  about  that  it  is  regarded 
as  a  function  conferring  a  common  benefit  at  least  in  part,  and 
passes  into  class  three.  There  are  forces  at  work  which  seem 
likely  to  place  it  finally  in  class  one.  In  the  case  of  highways 
this  transition  has  been  completely  made,  and,  except  in  the 
case  of  city  streets,  which  still  belong  to  class  three  so  far  as 
construction  is  concerned,  but  pass  into  class  one  as  soon  as 


THE   NATURE   OF  THE   STATE   AND   ITS   FUNCTIONS      21 

finished,  highways  are  usually  treated  as  conferring  common 
benefit  only. 

In  the  following  chapters  on  expenditure  the  order  indicated 
above  will  be  followed.  The  arrangement  of  the  different 
expenditures  under  class  one  will  be  somewhat  according  to 
historical  origin  and  importance. 


CHAPTER   II 
THE   GROWTH   OF  PUBLIC   EXPENDITURES 

Section  i.  Rapidity  of  Growth.  —  Public  expenditures 
have  grown  very  rapidly,  especially  since  1850.  They  are  still 
growing  fast  in  all  progressive  countries.  The  growth  is  a 
striking  accompaniment  of  the  intensification  of  popular  gov- 
ernment. The  more  democratic  a  government  becomes,  the 
more  do  the  people  incline  to  spend  upon  government  activ- 
ities. 

This  growth  shows  up  very  large  when  stated  in  absolute 
figures.  But,  of  course,  it  should  also  be  considered  relatively. 
That  is,  it  should  be  stated  in  proportion  to  population  and  to 
wealth.  The  increase  in  public  expenditures  is  more  rapid  than 
the  increase  in  population.  It  is  probably  more  rapid,  also, 
than  the  increase  in  wealth  and  in  private  incomes,  although 
this  statement  is  difficult  to  prove  statistically  and  possibly  is 
true  only  where  governments  are  most  active  or,  to  use  a  com- 
mon phrase,  most  progressive. 

The  statistics  of  public  expenditure  are  now  being  published 
by  most  governments  in  great  detail,  and  on  account  of  their 
multiplicity  cannot  be  introduced  here.  They  are  very  diffi- 
cult to  interpret.  One  reason  for  this  is  that  no  altogether 
satisfactory  measure  of  the  private  income  and  private  wealth 
of  the  people  of  different  nations  has  yet  been  devised.  Wel- 
fare, measured  in  the  joy  of  living,  as  distinct  from  wealth, 
measured  in  money,  is  so  often  the  aim  of  public  expenditures, 
that  it  seems  illogical  to  set  up  comparisons  based  solely  on 
private  money  incomes  and  public  money  expenditures.  The 
effect  of  good  roads  may  be  measured,  in  part,  by  the  increased 
value  of  the  farms  served ;  but  what  is  the  money  value  of  the 

22 


THE   GROWTH  OF  PUBLIC   EXPENDITURES  23 

training  obtained  in  good  schools,  or  of  the  peace  of  mind  which 
an  old  age  pension  system  affords? 

Wars  which  break  out  with  ever  greater  violence  each  time 
leave  behind  them  great  debts,  with  heavy  interest  charges  to 
be  met  each  year.  We  think  of  these  as  extraordinary  charges, 
and  when  so  conceived  they  seem  to  conceal  any  general  trend 
in  the  ordinary  charges. 

Another  cause  of  confusion  in  the  interpretation  of  the 
statistics  of  the  increase  in  public  expenditures  is  found  in  the 
changes  in  the  purchasing  power  of  money,  in  which  all  expen- 
ditures are  necessarily  measured.  Even  if  by  the  method  of 
index  numbers  we  could  arrive  at  an  approximate  basis  of  com- 
parison between  different  years,  we  are  still  confronted  by  a 
more  serious  difficulty.  That  is,  there  has  been  an  enormous 
change  in  the  relative  importance  of  the  things  which  money 
will  buy  and  in  the  services  governments  require.  How  can 
one  find  a  basis  of  comparison  to  measure  the  difference  be- 
tween the  primitive  public  housekeeping  of,  say,  William  of 
Normandy  and  the  complex  organisation  of  government  under 
George  V?  Or  between  the  days  of  Washington  and  those 
of  Wilson? 

Public  expenditures  grow  because,  and  as,  pubHc  activities 
increase  and  multiply.  This  increase  is  both  extensive  and 
intensive.  Governments  in  every  branch,  central,  interme- 
diate and  local,  are  constantly  assuming  new  work  or  duties, 
and  are  constantly  performing  the  older  functions,  and  in  turn 
the  newer  ones,  also,  on  an  ever  larger  scale.  Public  schools, 
for  example,  were  long  ago  added  to  government  activities. 
At  first  they  included  only  the  primary  grades.  Then  there 
were  added  grammar  grades,  high  schools,  normal  schools,  and 
even  universities.  Instruction  becomes  more  and  more  diver- 
sified and  intensified  and  even  research  is  subsidised.  The  end 
is  not  in  sight. 

Governments  sometimes  drop  functions.  The  dropping  or 
curtailment  of  the  government's  interest  in  and  contributions 
to  religion  is  the  best  illustration.  This,  however,  is  almost 
the  only  important  illustration   to  be  found  in  recent  ages. 


24  INTRODUCTION  TO   PUBLIC   FINANCE 

Most  changes,  like  the  abandonment  of  the  town  pump  for  a 
new  waterworks  system,  involve  only  the  substitution  of  a 
better  service  for  a  less  complete  one. 

Extravagance.  —  When  attention  is  directed  merely  to  the 
aggregate  of  public  expenditures  the  rapid  increase  sometimes 
causes  alarm.  Then  charges  of  extravagance  are  made  against 
the  party  in  power.  But  it  takes  only  a  moment's  considera- 
tion to  realise  that  the  real  question  is  not  as  to  the  amount 
spent,  but  as  to  the  wisdom  of  the  expenditures.  It  is  quite 
possible  that  to  spend  too  little  on  public  schools  may  be  far 
worse  than  spending  too  much.  If,  after  due  and  careful  con- 
sideration, it  has  been  decided  that  an  elaborate  system  of 
highways  should  be  built,  the  consequent  increase  in  expendi- 
tures is  not  per  se  evidence  of  extravagance.  If  the  highways 
serve  a  real  need  and  are  well  built  and  well  kept,  they  may  be  a 
source  of  many  economies  to  the  people  and  also  to  the  govern- 
ment. It  was  not  the  size  of  the  expenditures  of  the  French 
court  in  the  i8th  century,  but  the  non-pubhc,  non-social  char- 
acter of  them  which  contributed  to  the  French  Revolution. 

Of  general  principles  or  controlling  laws  there  are  few  to  be 
found  in  this  field.  The  wisdom  or  folly  of  each  individual 
expense  should  always  be  the  point  at  issue.  In  1776  the  people 
of  Pennsylvania  wrote  into  their  constitution  the  following  piece 
of  profound  wisdom :  "  the  purpose  for  which  any  tax  is  to  be 
raised  ought  to  appear  clearly  to  the  legislature  to  be  of  more  ser- 
vice to  the  community  than  the  money  would  be  if  not  collected." 

Sec.  2.  Government  Business  Obeys  Law  of  Increasing 
Cost.  —  Whether  governments  serve  the  pubHc  better  or 
worse  than  private  enterprise  could  or  would,  in  activities  in 
which  a  choice  is  possible,  is  a  question  on  which  opinions 
differ.  Public  finance  has  a  clear  teaching  on  one  vital  point. 
It  is  distinctly  in  the  evidence  that,  by  and  large,  as  now  con- 
ducted, government  business  obeys  the  law  of  diminishing 
returns  or  increasing  cost  per  person  served.  The  larger  the 
population  served,  the  greater  is  the  per  capita  cost.^     It  has 

•  Data  on  this  point  will  be  found  in  my  little  book  on  Government  Finance  in 
the  United  States,  esp  p.  86. 


THE   GROWTH  OF  PUBLIC   EXPEXDITURES  25 

sometimes  been  thought  by  careless  observers  that  since  large 
scale  production  is  generally  cheaper  per  unit,  other  things 
being  equal,  than  is  small  scale  production,  so  the  cost  of 
government  ought  to  become  cheaper  per  capita  as  population 
grows.  But  such  is  not  the  case  in  practice.  Generally  speak- 
ing, great  cities  spend  more  per  capita  and  impose  heavier  tax 
burdens  than  do  smaller  ones.  The  highest  government  costs 
are  generally  to  be  found  where  population  is  densest.  The 
fact  seems  to  be  that  large,  or  dense,  populations  at  once  require, 
and  afford  an  opportunity  for,  larger  government  activities. 
The  post  office  is  clearly  an  activity  in  which  large  scale  opera- 
tion should  render  the  cost  per  unit  less  than  when  the  business 
is  small.  But  the  constant  demand,  the  insistent  demand 
which  will  not  down,  for  lower  rates,  more  service,  and  new 
kinds  of  ser\ace  from  the  post  office,  eats  up  the  savings  which 
large  scale  operations  might  have  made  possible.  The  resi- 
dents of  large  cities  might  have  made  a  saving  per  capita  on 
street  lighting  as  the  cities  grew  larger,  had  they  been  content 
with  the  same  grade  of  lighting.  But  instead  they  demanded 
more  light  and  now  revel  at  night  along  "  great  white  ways  " 
resplendent  with  ornate  electrical  electroliers.  The  activities 
of  the  police  departments  of  large  cities  are  almost  the  only 
ones  which  seem  to  be  cheaper  per  capita  as  cities  grow  larger. 
But  there  is  at  the  same  time  a  rapid  growth  in  analogous 
functions,  so  even  this  may  be  only  an  apparent  advantage. 

The  facts  of  public  expenditures  seem  to  bear  out  President 
Wilson,  who  said :  "  The  people  of  the  United  States  do  not 
wish  to  curtail  the  activities  of  their  government,  they  wish, 
rather,  to  enlarge  them ;  and  with  every  enlargement,  with  the 
mere  growth  indeed  of  the  country  itself,  there  must  come,  of 
course,  the  inevitable  increase  in  expenses." 


CHAPTER  III 
EXPENDITURE   MAINLY  FOR  THE   COMMON   BENEFIT 

Section  i.  Net  Expenditure.  —  In  this  chapter  we  shall 
consider  expenditure  of  the  first  class ;  that  is,  expenditure 
treated  by  the  government  as  so  clearly  for  the  good  of  all  that 
no  special  charge  is  made  upon  any  of  the  individuals  inciden- 
tally benefited.  From  one  point  of  view  expenditure  of  the 
second  class,  wholly  for  the  benefit  of  certain  persons,  who  are, 
however,  exempt  from  any  special  payments,  the  expense  being 
treated  as  involving  only  common  benefit,  is  sufficiently  like 
that  of  class  one  to  come  under  the  heading  of  this  chapter. 
But  it  has  been  made  a  part  of  the  next  chapter  in  order  not  to 
lengthen  this  one  unduly.  Both  of  these  expenditures  might 
well  be  called  net  expenditures  in  distinction  from  those  which, 
unlike  them,  develop  some  accompanying  revenues. 

Administrative  Expenditures.  —  The  first  item  is  that  for 
general  administration.  Administrative  expenditure  is  for  the 
support  of  those  officers  of  the  government  who  have  to  do 
with  civil  affairs.  For  convenience  it  is  best  to  limit  it  to  those 
officers  whose  functions  are  absolutely  indispensable  to  the 
execution  of  the  laws.  The  officers  who  will  be  included  vary, 
from  country  to  country,  with  the  frame  of  the  government. 
It  has  been  customary  for  financial  writers,  following  the  lead 
of  the  cameralists,  to  limit  their  discussion  of  this  expenditure 
to  that  for  the  crown  and  court.  This  is,  in  England,  called 
the  civil  list.  The  peculiar  character  of  such  expenditure  in 
monarchical  countries  makes  it  advisable  to  isolate  it.  But  it 
must  be  borne  in  mind  that  in  republican  countries  there  is  no 
corresponding  expenditure.  The  salaries  of  the  highest  execu- 
tive officials  in  republics  are  of  the  same  character  as  those  of 

26 


EXPENDITURE   :MAINLY    FOR   THE   COMMON   BENEFIT      27 

the  ministerial  officials  in  monarchies.     In  England  the  civil 
list  provides  for  his  Majest^^'s  privy  purse,  household,  charities, 
etc.,  and  for  the  annuities  paid  to  members  of  the  royal  family. 
In  most  monarchical  countries  these  expenses  were  originally 
met  by  the  revenues  from  the  crown  estates.     But  the  revenues 
from  the  domains  having  been  absorbed  by  the  general  treasury, 
it  became  necessary  to  make  provision  for  the  civil  list  from 
the  general  revenues.     To  the  civil  list  should  be  added  the 
salaries  and  other  expenses  of  the  ministries,  their  clerks,  sec- 
retaries, etc.     In  federal  governments  the  administrative  de- 
partments of  the  component  parts  or  commonwealths,  as  well 
as  that  of  the  central  government,  should  be  included.     Finally, 
there  are  the  administrative  departments  of  the  local  govern- 
ments.    It  is  very  difficult  to  ascertain  the  number  of  such 
officials  and  almost  impossible  to  ascertain  all  such  expenses. 
In  monarchical  governments,  and  to  a  certain  extent  also  in 
republican  governments,  traditional  sentiment  demands  that 
the  head  of  the  government  shall  hold  a  social  position  of  great 
prominence  and  perform  certain  merely  ornamental  functions, 
involving  considerable  expenditure.     So  that  the  expenditure 
for  the  services  of  the  highest  officials  is  often  larger  than  the 
sums  which  would  be  necessary  to  obtain  merely  efficient  ser- 
vice.    This  lavish  expenditure  may  be  fully  justified  on  political 
grounds,  but  as  it  involves  great  waste,  both  directly  and  indi- 
rectly by  example,  it  cannot  be  justified  on  economic  or  fiscal 
grounds.!     It  is  a  general  fiscal  principle,  applicable  as  well  to 
this  part  of  expenditure  as  to  any  other,  that  the  expenditure 
should  not  be  larger  than  is  necessary  to  secure  the  most  effi- 
cient service.     The  justification  of  this  lavishness,  therefore, 
must  be  found,  if  anywhere,  in  the  creation  of  some  equal  utility 
recognised  by  political  science.     The  exceptions  made  in  prac- 
tice to  the  general  rule  of  economy  do  not  extend  beyond  the 
heads  of  the  administrative  departments.     In  the  subordinate 
positions  the  remuneration  does  not  generally  exceed  and  is 
often  below  that  which  must  be  paid  for  similar  services  in  pri- 
vate life.     Indeed,  there  is  a  certain  saving,  in  that  many  of 

1  Rau,  Finanzwissenschafl,  sec.  48. 


28  INTRODUCTION  TO  PUBLIC   FINANCE 

the  positions,  especially  where  the  tenure  of  office  is  secure  for 
a  relatively  long  period,  can  be  filled  at  a  lower  cost  than  the 
same  services  command  elsewhere,  on  account  of  the  honour 
attaching  to  them.  In  those  countries  where  the  expenditure 
for  the  higher  positions  is  largest  much  is  saved  by  the  lower 
pay  attaching  to  subordinate  positions. 

Diplomatic  and  Consular  Service.  —  In  this  connection 
mention  may  be  made  of  the  diplomatic  and  consular  service, 
which,  while  partly  conducive  to  the  better  performance  of 
other  functions,  as,  for  example,  defence  and  the  regulation  of 
commerce,  is  yet  properly  considered  to  be  subordinate  to  the 
executive  departments.  Here  again  the  traditional  opinion, 
that  the  dignity  of  the  nation  can  only  be  properly  sustained 
by  a  lavish  expenditure  on  the  part  of  the  ambassador  or  min- 
ister, imposes  on  the  treasury  burdens  far  greater  than  the 
value  of  the  services  rendered,  if  measured  by  the  ordinary 
business  standards.  As  the  means  of  communication  improve 
and  the  general  efficiency  and  reliability  of  the  news  agencies 
of  the  public  press  grow,  it  becomes  harder  and  harder  to  justify 
this  extravagance  even  on  political  grounds.  The  custom  of 
lavish  expenditure  for  diplomatic  services  has  not  been  carried 
to  such  extremes  by  the  United  States  as  by  other  countries. 
As  these  positions  were  formerly  more  or  less  of  the  nature  of 
political  prizes,  in  that  country,  this  has  probably  been  to  the 
improvement  of  the  service.  In  recent  years  the  foreign  rela- 
tions of  the  United  States  have  grown  in  importance.  There 
has  been  a  distinct  effort  to  increase  commerce  with  South 
America  and  to  promote  a  better  mutual  understanding.  Com- 
mercial attaches  are  being  added  to  the  more  important  min- 
istries. Young  men  can  now  look  forward  to  the  consular 
service  as  a  career  and  train  for  it.  There  has  been  a  marked 
corresponding  increase  in  cost.  Meanwhile  Great  Britain, 
having  always  had  an  adequate  service,  has  increased  her 
expenses  but  little. 

The  Cost  of  Collecting  the  Revenues.  —  To  the  adminis- 
trative department  belongs  the  expenditure  for  the  collection 
of  the  revenues.     Although  this  is  a  part  of  the  gross  expendi- 


EXPENDITURE   MAINLY   FOR  THE   COMMON   BENEFIT      29 

tures  only,  it  is  properly  included  in  the  general  accounts  so  as 
to  render  control  possible. 

While  the  cost  of  collecting  revenue  will  naturally  vary  very 
much  with  circumstances,  some  generalisations  are  permissible. 
The  cost  of  collecting  customs  duties  should  be  kept  within 
three  per  cent,  and  that  of  internal  excise  taxes  within  still 
narrower  limits.  But  if  the  total  amount  to  be  raised  is  rela- 
tively small  the  cost  is  likely  to  be  proportionately  larger.  In 
like  manner  heavy  direct  taxes  are  proportionately  less  costly 
to  collect  than  are  light  ones. 

Sec.  2.  The  Legislative  Department.  —  The  expenditure 
involved  in  the  payment  of  salaries  to  legislative  officers,  when 
any  such  are  paid,  is  not  the  largest  part  of  the  expenses  caused 
by  the  maintenance  of  such  bodies.  There  are  the  clerks,  aides, 
pages,  etc.,  in  immediate  attendance  upon  the  bodies  during 
their  session,  the  expenses  of  elections,  which  in  this  case  swell 
to  considerable  amounts,  the  costs  of  investigations,  public 
hearings,  etc.,  necessary  to  put  the  legislature  in  possession  of 
the  facts  upon  which  to  base  their  actions,  and  the  expenses  of 
promulgating  laws,  publishing  speeches,  reports,  etc.,  all  of 
which  together  form  no  inconsiderable  burden  on  the  finances 
of  every  nation  enjoying  legislative  government.  These  ex- 
penses also  extend  from  the  federal  government  down  to  the 
municipal  governments.  The  desirableness  or  undesirableness 
of  paying  legislative  officers  for  their  services  is  a  matter  for 
political  science  to  determine,  and  depends  in  large  measure 
upon  the  traditions  of  the  different  peoples.  In  England  rela- 
tively little  is  spent  in  this  way  in  any  of  the  legislative  depart- 
ments of  the  government  from  Parliament  down  to  the  parish. 
But  in  that  country  there  is  a  tradition  of  unpaid  public  service 
that  gives  her  much  help  in  this  direction.  In  the  United 
States  the  direct  emoluments  and  other  legitimate  expenses  of 
the  federal  Congress,  and  the  direct  and  indirect,  more  or  less 
illegal,  raids  by  the  commonwealth  legislatures  on  the  treas- 
uries, as  well  as  those  made  by  the  city  councillors  and  alder- 
men, are  very  large. 

Some  mention  should  also  be  made  of  the  expenses  involved 


30  INTRODUCTION  TO   PUBLIC   FINANCE 

in  the  support  of  local  or  semi-local  legislative  bodies.  For  the 
United  States,  there  are  the  State  legislatures  and  the  city 
councils,  and,  for  England,  the  local  government  board  and  the 
county  and  municipal  councils.  Of  these,  only  the  common- 
wealth legislatures  are  purely  legislative  in  character.  The 
others  perform  functions  which  are  better  described  as  admin- 
istrative. It  is  so  difficult  to  obtain  a  correct  estimate  of  the 
particular  expenses  for  the  support  of  these  subordinate  bodies 
as  to  be  an  unprofitable  task.  These  bodies,  too,  are  so  inti- 
mately concerned  in  the  administration  of  the  other  functions 
that  we  gain  little  by  isolating  the  mere  expenses  of  their  main- 
tenance. With  the  commonwealth  legislatures,  however,  the 
matter  is  different.  These  are  purely  legislative.  In  most 
commonwealths  the  legislatures  are  paid  per  diem,  and  they  are 
prevented  from  running  up  too  large  bills  by  the  limitation  of 
their  term.  The  per  diem  remuneration  and  mileage  are  fixed 
by  law,  and  range  from  $5  to  $io  a  day  and  from  five  cents  to 
ten  cents  per  mile.  A  loophole  for  additional  expense  is  left 
by  the  necessity  of  allowing  the  legislature  to  appropriate  money 
for  incidental  expenses.  Money  is  spent  for  the  hire  of  personal 
attendants  on  members,  stenographers,  clerks,  etc.,  for  tours  of 
inspection  to  various  institutions,  and  the  like.  This  abuse 
became  so  flagrant  in  California  that  it  was  eventually  pro- 
hibited by  a  constitutional  amendment  limiting  the  expenses 
of  the  legislature.  Most  of  this  expenditure  contravenes  the 
rule  of  economy.  England  in  the  absence  of  the  federal  sys- 
tem is  spared  this  expense. 

Expense  of  Judiciary.  —  A  very  considerable  part  of  the  ex- 
pense of  maintaining  the  judiciary  is  treated  as  a  matter  of 
common  benefit.  These  expenditures  are  sufficient  to  insure 
the  continued  existence  of  the  courts,  whether  they  have  any 
litigation  before  them  or  not.  But  as  some  part,  and  often  a 
very  considerable  part,  of  the  costs  of  actual  litigation  falls  on 
the  litigants,  and  as  the  courts  are,  in  most  places,  almost 
continuously  engaged  in  work  of  that  kind,  it  seems  more  con- 
sistent with  our  classification  to  treat  this  expenditure  as  one 
partly  for  private  benefit,  under  class  three. 


EXPENDITURE   MAINLY   FOR  THE   COMMON   BENEFIT      3 1 

Sec.  3.  Public  Buildings.  —  The  construction  and  main- 
tenance of  public  buildings  for  the  convenience  of  the  executive 
and  legislative  departments  and  for  other  purposes  is  one  of  the 
most  important  although  not  one  of  the  largest  items  of  expen- 
diture. The  construction  of  such  buildings  is  of  course  neces- 
sary. That  they  should  be  imposing  edifices,  handsomely 
decorated  and  equipped,  is  a  matter  of  national  and  local  pride. 
That  their  construction  should  not  be  wasteful  is  self-evident. 
•The  extravagances  and  theft  which  have  too  often  accompanied 
the  construction  of  such  buildings  in  the  United  States  are  too 
well  known  to  need  discussion.  They  are  purely  abuses  and 
need  no  further  words  of  condemnation  than  they  have  always 
received.  The  cost  of  construction  may  be  regarded  as  a  per- 
manent investment,  not  yielding  a  money  revenue,  but  im- 
portant utilities.  These  expenditures  are  obviously  subject  to 
great  fluctuations  from  year  to  year. 

The  exact  annual  value  of  these  utilities  to  the  government 
cannot  be  directly  estimated  in  money.  Indirectly  it  might  be 
estimated  as  the  equivalent  of  the  interest  on  the  sums  which 
it  would  cost  to  replace  them  in  the  most  economical  manner, 
less  the  annual  cost  of  the  repairs.  As,  in  some  cases,  the 
original  expenditures  were  extravagant  and  wasteful,  this 
method  of  computation  would  result  in  a  smaller  sum  than  the 
interest  on  the  original  cost. 

Sec.  4.  Cost  of  Defence.  —  A  nation  differs  from  individuals 
in  that  no  law  can  be  imposed  upon  it  by  any  external  human 
power.  The  enforcement  of  the  rights  and  obligations  of  na- 
tions in  their  intercourse  with  one  another  is  left  to  the  different 
nations  themselves.  As  long  as  international  law  offers  no 
peaceful  means  of  redressing  wrongs,  war  is  the  only  resource. 
"International  law,"  says  Woolsey,  "assumes  that  there  must 
be  *  wars  and  fightings  '  among  the  nations."  This  assump- 
tion is  universally  correct.  There  are  no  signs,  as  yet,  in  spite 
of  the  peace  conferences  at  The  Hague,  and  the  proposal  of  a 
League  of  Nations,  that  nations  will  cease  to  consider  that  war, 
or  at  least  the  actual  preparation  therefor,  as  its  sole  preventive, 
is  an  absolute  necessity.     The  whole  theory  of  the  independence 


32        INTRODUCTION  TO  PUBLIC  FINANCE 

and  equality  of  sovereign  States,  upon  which  international  law 
proceeds,  throws  the  maintenance  of  national  dignity,  honour, 
and  recognised  national  rights  upon  the  nations  themselves. 
The  extent  and  character  of  preparation  for  war  in  each  State 
depends  upon  its  history,  national  character,  and  geographical 
situation.  Thus,  the  warlike  traditions,  the  mutual  distrust, 
and  contiguity  of  France  and  Germany,  impelled  to  extensive 
preparation  for  war,  and  similar  considerations  affected  other 
nations  of  Europe.  On  the  other  hand,  the  traditions,  national 
character,  and  geographical  position  of  the  United  States,  until 
after  the  war  with  Spain  in  1898,  led  to  a  feeling  of  security,  and 
a  preparation  so  insignificant,  compared  to  European  arma- 
ments, as  to  call  forth  continual  warnings  and  protests  from 
mihtary  authorities.  As  a  result  of  the  acquisition  of  territory 
in  the  Pacific,  and  in  the  Orient,  there  has  been  thrown  upon  the 
United  States  the  burden  of  maintaining  the  bulwark  between 
the  white  and  the  yellow  races,  on  the  western  side  of  the  terri- 
tory occupied  by  the  whites.  The  unavoidable  expenses  for  this 
purpose,  while  they  have  not  yet  reached  the  magnitude  of  those 
of  England  and  of  Russia  for  the  defence  of  the  eastern  side  of 
their  outlying  possessions,  are  already  large  and  are  growing 
rapidly.  The  necessity  and  probable  continuance  of  this  burden 
on  the  finances  of  nations  being  thus  predetermined,  the  only  task 
for  the  student  of  finance  is  to  ascertain  how  great  a  burden  this 
imposes  on  the  treasuries  and  what  possibility  there  is  for  some 
return.  An  extended  discussion  of  the  actual  expenses  of  war 
itself  is  given  at  the  end  of  this  book.  In  this  chapter  we  are 
discussing  only  peace  time  expenditures  of  a  mihtary  character. 
There  has  been  much  discussion  of  the  relative  merits  and 
economy  of  the  different  methods  of  army  organisation.  It  is 
pointed  out  that  the  German  system  of  compulsory  service  of  all 
citizens  without  remuneration  shows  a  much  smaller  cost,  per 
man,  than  the  Enghsh  and  American  system  of  paid  enUstment. 
But  it  is  urged  again  that  there  are  in  Germany  a  larger  number 
of  expenses  involved  in  the  army  system  than  those  of  the 
government,  as  the  personal  expenditures  of  the  soldiers,  the 
cost  of  the  country  from  the  disturbance  of  production,  the 


EXPENDITURE   IMAINLY    FOR  THE    COMINION   BENEFIT      33 

extra  costs  of  enrolment,  of  free  quarters  during  manoeuvres, 
etc.,  which  do  not  appear  in  the  budget,  but  which  should  be 
counted  in  before  any  fair  comparison  can  be  made.  It  would 
seem  that,  in  the  end,  the  actual  net  expenditure  for  this  purpose 
could  only  be  as  much  less,  per  man,  as  the  standard  of  living  of 
the  soldier  is  less  in  the  one  country  than  in  the  other.  And  on 
this  ground  it  might  be  urged  that  the  German  system,  which 
gives  the  soldier  but  little  spending  money  to  waste,  and  by  very 
strenuous  measures  inculcates  thrift  and  almost  penurious 
economy,  is  on  the  whole  the  cheaper.  How  much  again  this 
lessens  the  efficiency,  per  man,  and  necessitates  a  larger  num- 
ber of  soldiers  is  hard  to  estimate.  In  England  the  volunteer 
system,  while  adding  somewhat  to  the  cost,  does  not  make  as 
heavy  drains  on  the  treasury  as  do  the  German  reserves ;  but  as 
the  expenditure  by  the  individual  members  of  the  volunteer 
service  is  for  a  public  purpose,  it  is  a  part  of  the  cost  of  the  sys- 
tem, and  a  part  that  is  very  difficult  to  estimate.  On  the  whole 
no  accurate  comparison  is  possible. 

The  following  figures  are  instructive :  In  the  budget  of  1894- 
95  England  appropriated  for  the  army  £18,000,000,  for  the 
navy  £18,700,000,  together  £36,700,000;  for  1908-9,  army 
£29,459,000,  navy  £32,329,500,  together  £61,788,500;  in  the 
last  pre-war  budget,  army  £28,885,000,  navy  £51,550,000, 
together  £80,435,000.  The  United  States  appropriated  in  1895, 
army  $54,500,000,  navy  $31,700,000,  total  $86,200,000,  but  this 
included  $16,000,000  for  new  vessels;  in  1906,  army  $117,900,- 
000,  navy  $110,500,000,  together  $228,400,000;  in  1914,  army 
$94,300,000,  navy  $140,700,000,  together  $243,000,000.  In 
most  countries  the  preparation  for  war  is  a  source  of  rapidly 
growing  expenditure. 

Aside  from  maintaining  the  integrity  and  the  dignity  of  the 
State,  which  are,  of  course,  the  greatest  conceivable  public  bene- 
fits, the  expenditures  for  the  army  and  the  navy  yield  little  direct 
economic  return.  The  navy  protects  the  citizens  abroad  and 
contributes  thus  to  the  pursuit  of  commerce;  while  the  army, 
likewise,  keeps  open  the  channels  of  internal  trade.  In  those 
countries  where  the  entire  male  population  is  passed  through 


34  INTRODUCTION  TO  PUBLIC   FINANCE 

rigid  military  training,  the  military  system  supplements  in  a 
very  important  manner  the  general  educational  system  and 
gives  valuable  mental  and  physical  training.  Countries  with 
a  small  standing  army  participate  in  this  benefit  to  a  much 
smaller  degree.  The  existence  of  a  strong  military  spirit  fosters 
the  virility  of  a  people,  and  hence  contributes  to  its  manhood 
and  efficiency  in  every  direction,  while  the  absence  of  that  spirit 
betokens  effeminateness  and  degeneracy.  But  these  are  benefits 
that  cannot  be  measured  statistically,  nor  in  money,  and  must 
be  left  for  the  sociologists  to  discuss. 

The  Expense  of  War.  —  The  expenses  of  actual  war  are  not 
a  part  of  the  regular  budget  of  modern  nations.  They  are 
always  treated  as  exceptional  or  extraordinary  expenses.  Be- 
sides the  sums  actually  expended  by  the  public  treasury  there 
are  many  indirect  losses  and  expenses  involved.  According  to 
the  estimates  of  Wilson  ^  the  cost  of  wars  to  England  from 
1688  to  1882  was  over  £1,258,680,000.  The  estimated  cost 
of  the  Boer  War  to  England  was  over  £182,000,000.  The  cost 
to  the  United  States  of  the  Civil  War  is  hard  to  estimate.  The 
debt  incurred  amounted  to  $1,845,900,000;  $800,000,000  of 
revenues  were  spent  during  the  war ;  commonwealths  and  cities 
spent  a  part  of  their  current  revenues  and  rolled  up  debts,  and 
the  pensions  will  probably  amount  to  over  $2,000,000,000; 
$6,000,000,000  represents  approximately  the  actual  expenditure 
by  all  the  governmental  agencies  on  the  side  of  the  North. 
Data  on  the  World  War  will  be  found  in  a  chapter  at  the  end 
of  this  book.  Every  important  war  leaves  behind  it  a  great 
burden  of  debt;  and  the  debt  charges,  including  interest  and 
repayment  of  principal,  run  on  for  years.  It  was  estimated 
that  before  the  World  War  Great  Britain  had  hquidated  only 
such  part  of  her  debt  as  was  contracted  prior  to  the  revolution 
of  her  American  colonies.  The  United  States,  on  the  other 
hand,  has  ever  pursued  a  policy  of  speedy  debt  payment  and 
prior  to  the  Great  War  was  practically  out  of  debt.  Wars  have 
also  been  the  occasion  for  granting  of  soldiers'  pensions  dis- 
cussed in  the  next  chapter. 

*  The  National  Budget,  etc. 


EXPENDITURE  MAINLY   FOR  THE   COMMON   BENEFIT      35 

The  general  preparation  for  internal  peace  and  security  and 
the  prosecution  or  punishment  of  the  disturbance  of  that  se- 
curity by  individuals  or  small  groups  of  persons  is  a  very  impor- 
tant item  of  expense.  Such  security  is  generally  maintained 
by  the  police  and  the  military.  In  the  United  States  the  chief 
expense  is  borne  by  the  cities.  The  states  and  counties  have 
their  own  police  ofiScers  for  this  purpose,  as  do  also  towns  not 
cities. 

Sec.  5.  Roads.  —  The  building  and  maintenance  of  roads 
is  a  source  of  expenditure  which  well  illustrates  the  general 
trend  of  development.  Adam  Smith  regarded  the  maintenance 
of  roads  as  an  activity  conferring  so  special  a  benefit  on  the 
individual  user  that  he  should  bear  the  burden.  Even  Bastable 
places  them  among  the  "  industries  of  the  State."  ^  But  the 
universal  tendency  is  to  make  the  maintenance  of  roads  a  com- 
mon burden  because  conferring  a  common  benefit.  The  care 
of  the  roads  is  generally  a  duty  of  the  local  governments,  and 
in  the  United  States  the  first  taxes  laid  in  the  colonies,  and 
afterwards  in  the  new  states,  were  for  this  purpose.  The  federal 
government  stopped  spending  much  for  roads  and  canals  after 
1840. 

Quite  recently,  however,  the  states  have  again  taken  over 
the  care  of  roads  to  a  large  extent.  Road  building  by  separate 
districts  is  apt  to  lack  coordination.  If  the  districts  are  small 
uniformity  of  work  is  not  attainable  and  even  if  they  are  fairly 
large  there  may  be  a  harmful  lack  of  uniformity.  For  central 
highways  several  hundred  or  several  thousand  miles  in  extent, 
the  plan  of  unsupervised  district  building  is  not  practicable. 
Generally  there  are  expensive  bridges  or  costly  grades  the  cost 
of  which  it  seems  proper  to  apportion  over  many  districts. 

One  of  the  most  marked  advances  in  modern  times  is  the 
"good  roads  movement."  From  roads  which  were  little  more 
than  graded,  to  stone  or  macadam  pavements,  and  finally  to 
highways  of  concrete  with  asphalt  top  is  an  enormous  advance. 
No  public  expenditure  brings  so  immediate  and  so  proportion- 
ately large  a  return  in  social  welfare.    Together  with  the  motor 

» Pp.  193, 194. 


36  INTRODUCTION  TO   PUBLIC    FINANCE 

vehicle  they  bid  fair  to  eliminate  the  distinction  between  city 
and  country.  They  facilitate  not  only  the  transportation,  but 
the  actual  production  of  food,  and  make  both  labour  and  capital 
more  mobile. 

Navigation.  —  The  maintenance  of  waterways,  roadsteads, 
harbours,  rivers,  canals,  is  also  a  public  function.  Canals,  to 
be  sure,  have  passed,  or  are  passing,  through  the  same  develop- 
ment as  roads,  and  in  some  respects  harbours  and  rivers  have 
also  done  so.  In  the  United  States  the  dredging  and  improve- 
ment of  the  facilities  for  navigation  in  rivers  and  harbours  are 
the  only  important  items  of  "  internal  improvement  "  that  have 
been  consistently  held  in  the  hands  of  the  federal  government. 
The  "  rivers  and  harbours  "  appropriation  was  at  one  time 
notorious  on  account  of  log-rolhng  and  possibly  of  graft.  In 
the  same  line  is  the  maintenance  of  lighthouses,  signal-stations, 
the  weather  bureau,  and  life-saving  stations.  The  last-named 
is  in  some  countries  supported,  in  part,  by  private  contributions. 

Sec.  6.  The  Cost  of  Education.  —  No  expenditure  com- 
mends itself  more  than  that  for  education.  It  creates  the 
groundwork  of  all  political  institutions.  No  expenditure  in  the 
opinion  of  Geffcken  is  more  "  reproductive  "  than  that  which 
the  State  makes  for  the  development  of  its  future  citizens.  But 
the  expenditure  of  the  various  countries  for  this  purpose  cannot 
very  well  be  compared,  because  it  is  very  difficult  to  obtain  a 
complete  statement  of  all  the  outgo  under  this  head.  The 
local  governments  generally  have  certain  lower  branches  under 
their  control  and  pay  a  part  or  the  whole  of  the  expense  of  those. 
In  federal  governments  the  remainder  of  the  system  is  generally 
under  the  control  of  the  component  parts.  The  United  States 
federal  government  has  rendered  assistance  to  the  common- 
wealth and  local  schools  by  grants  of  land  of  unknown,  but  very 
large  value,  and  by  the  collection  and  dissemination  of  infor- 
mation through  a  bureau  of  education,  and  in  various  other 
ways.  In  England  the  provision  for  education  made  by  public 
authorities  is  generally  less  than  in  most  other  countries,  the 
sole  exception  being  the  provision  for  technical  education. 
Until  very  recently  this  Hne  of  public  activity  has  been  regarded 


EXPENDITURE  ^MAINLY   FOR  THE   COMMON  BENEFIT     37 

by  that  country  as  one  conferring  a  special  benefit  and  to  be 
paid  for  in  part  by  fees.  But  it  is  now  pretty  clearly  the  ac- 
cepted poHcy  of  all  modern  nations  to  provide  at  least  the  pri- 
mary education  necessary  for  every  citizen  as  a  common  benefit 
and  to  make  it  compulsory  and  free  to  all  the  recipients.  In 
treatment,  then,  it  is  regarded  as  being  as  much  a  benefit  to 
the  rich  childless  man  to  have  the  sons  of  his  poorer  neighbour 
educated  as  that  he  should  have  the  protection  of  the  police 
in  the  enjoyment  of  his  property,  and  he  is  made  to  pay  on  that 
principle.  In  regard  to  higher  education  as  given  in  the  second- 
ary schools,  and  technical  education,  there  is  no  such  uniformity 
of  practice.  Education  in  the  rudimentary  mechanical  arts 
is  in  fact  becoming  as  important  a  need  of  society  as  elementary 
education  in  the  usual  branches.  As  the  pace  of  industry  be- 
comes more  rapid  and  its  organisation  more  perfect,  the  pos- 
sibility of  giving  this  sort  of  instruction  by  the  old  apprentice- 
ship system  vanishes.  There  is  no  place  for  the  boy  in  the 
modern  factory.  Private  initiative  cannot  be  depended  upon 
to  supply  the  opportunity  for  this  sort  of  education.  The 
State  has  to  do  so  if  it  is  done  at  all.  In  this  respect  many  of 
the  English  cities  are  far  ahead  of  any  American  city.^ 

Whether  college  and  university  education  should  be  given 
the  recipients  free  of  charge  at  the  common  cost  is,  in  practice, 
also  an  open  question.  Had  not  liberal  private  endowments 
been  made  for  this  purpose,  it  is  probable  that  the  question 
would  long  ago  have  been  settled,  and  that  this  branch  of  edu- 
cation would  have  been  treated  as  the  primary  was.  University 
education,  even  though  enjoyed  by  but  a  relatively  small 
number  of  the  citizens,  is  quite  as  "  reproductive  "  and  as  bene- 
ficial to  the  State  as  a  whole  as  even  a  widely  diffused  system 
of  primary  schools.  It  is  quite  as  important,  if  not  more 
important,  to  have-  highly  trained  leaders  of  public  action  and 
thought  as  it  is  to  have  a  low  degree  of  intelligence  widely 
disseminated.  The  university  as  a  centre  for  research  alone 
is  worth  many  times  what  it  costs  if  properly  conducted.  In 
proportion  to  the  benefits  which  it  confers  on  the  State  it  is, 

1  Shaw,  Municipal  Government  in  Great  Britain. 


38  INTRODUCTION  TO   PUBLIC   FINANCE 

where  run  at  the  general  cost,  the  least  expensive  part  of  the 
whole  system.  The  provision  made  by  many  of  the  western 
commonwealths  of  the  United  States  for  the  liberal  support  of 
universities  from  the  public  funds  has  been  without  exception 
the  most  beneficial  and  economical  expenditure  they  have  made. 
In  Germany,  too,  a  large  part  of  the  expense  is  borne  by  the 
State.  Closely  related  to  education  is  the  maintenance  of 
museums,  libraries,  picture  galleries,  and  scientific  investiga- 
tions. These  comprise  in  most  countries  an  important  part  of 
the  provision  for  education. 

Sec.  7.  Aid  to  Industry.  —  Indirectly  all  public  expendi- 
ture aids  private  industry  and  commerce.  But  there  are  many 
forms  of  direct  aid  that  are  treated  and  regarded  as  conferring 
a  common  benefit  on  all  ahke  although  accruing  to  the  good  of 
certain  persons.  Bounties  are  sometimes  offered  for  certain 
products.  Enterprises  of  various  kinds  receive  subventions  or 
partial  and  even  complete  exemption  from  taxation.  The  so- 
called  protective  system  involves  an  indirect  expenditure  of 
the  people's  money  in  the  same  way.  The  expense  of  main- 
taining the  currency,  of  building  and  keeping  up  roads,  canals, 
harbours,  and  the  like,  is  of  the  same  character.  So  are  many 
public  buildings,  as  exchanges,  markets,  slaughter-houses, 
structures  and  grounds  for  public  fairs  and  the  like,  and  com- 
missions and  other  organisations  for  collecting  and  disseminating 
knowledge  concerning  horticulture,  agriculture,  and  various 
industries.  The  maintenance  of  a  system  of  weights  and 
measures  also  belongs  here.  Besides  all  those  mentioned  and 
some  others  which  are  generally  treated  as  expenditures  for  the 
common  benefit,  there  are  a  great  many  things  which  the  State 
does  for  the  benefit  and  assistance  of  industry  and  commerce 
that  are  regarded  as  conferring  special  benefit  and  treated  as 
such. 

The  administrative  control  of  private  industry  and  commerce 
has  become  a  necessity  on  account  of  the  growing  power  of 
modern  organisations  of  capital  and  the  growing  importance  of 
the  "  public  "  functions  which  many  of  these  private  enter- 
prises perform.     The  necessity  has  been  widely  felt  of  con- 


EXPENDITURE   MAINLY   FOR  THE   COMMON   BENEFIT      39 

trolling  industrial  monopolies,  and  we  have  numerous  com- 
missions for  the  regulation  of  railroads  and  other  public-service 
industries.  To  this  branch  of  expenditure  belongs  also  the 
cost  of  the  control  exercised  over  the  production  and  sale  of 
foods  for  the  protection  of  the  public  health.  This  is  mainly 
an  expenditure  of  the  local  governments,  although  it  occa- 
sionally enters  into  that  of  central  government,  especially  in  the 
case  of  imported  foods.  In  the  United  States  the  federal 
government  has  assumed  this  important  function,  and  many 
of  the  states  are  supplementing  its  work.  The  cost  of  the 
enforcement  of  sanitary  regulations  of  all  sorts  is  another  ex- 
penditure of  the  same  character. 


CHAPTER  IV 

EXPENDITURE  MAINLY  FOR  THE  BENEFIT  OF  INDIVIDUALS 

Section  i.  Public  Charities.  —  In  this  chapter  we  shall  con- 
sider the  remaining  three  classes  of  expenditure.  These  are  not 
so  very  closely  akin,  but  have  one  point  of  similarity ;  namely, 
that  they  are  all  regarded  as  to  a  greater  or  lesser  extent  for  the 
particular  benefit  of  individuals.  The  first,  however,  is  not  so 
treated  by  any  nation,  but  is  treated  as  though  it  were  an  expen- 
diture for  the  benefit  of  all.  The  relief  of  indigence  and  the  pro- 
tection of  society  against  the  insane  and  the  criminal,  the  care 
of  the  feeble-minded  and  otherwise  defective  classes,  and  the 
care  of  the  sick  are  among  the  most  costly  and  most  discourag- 
ing features  of  public  expenditure.  In  the  United  States  the 
expenditure  for  pensions,  charities,  and  gratuities  amounts 
each  year  to  large  sums.  Generally,  even  after  the  State  has 
done  all  that  it  can  be  induced  to  do,  there  is  still  room  for 
private  effort  in  the  same  direction.  The  expenditure  by 
private  persons  and  societies  for  exactly  the  same  purposes  is 
possibly  larger  than  that  of  the  government ;  so  that  this  is 
one  of  the  heaviest  of  all  public  expenditures.  The  relief  of 
poverty  has  generally  received  more  attention  in  treatises  on 
economics  than  in  works  on  public  finance.  But  it  belongs  very 
properly  to  the  latter  science  as  well.  It  is  generally  a  local, 
rather  than  a  national,  expenditure,  but  on  account  of  its  vast 
size  and  economic  importance  has  often  received  the  attention 
of  the  central  authorities,  and  is  in  many  cases,  at  least  partly, 
under  their  control.  There  is  almost  no  expenditure  that  fails 
so  signally  to  accomplish  anything  like  permanent  results.  As 
frequently  administered,  poor  relief  has  aggravated  the  very  evils 
it  has  been  intended  to  reheve.     The  words  of  Malthus  are  still 

40 


EXPENDITURE  MAINLY  FOR  BENEFIT  OF  INDI\TDUALS     41 

true :  "  We  have  lavished  enormous  sums  on  the  poor,  which  we 
have  every  reason  to  beheve  constantly  tended  to  aggravate 
their  misery."  ^  Yet  the  expenditure  is  necessary,  indeed  im- 
perative, and  will  be  so  as  long  as  the  present  sentiments  on 
the  subject  prevail,  unless  we  can  remove  the  causes.  That  this 
may  be  done  by  the  extension  of  educational  facilities,  espe- 
cially technical  schools,  is  a  frequent  contention.  The  system- 
atic relief  of  poverty  in  such  manner  as  to  lessen  its  evil  has 
recently  become  the  study  of  scholars  and  of  able  adminis- 
trators, and  some  progress  has  been  made.  The  student  of 
finance  need  not  enter  into  the  question  of  the  causes  nor  of  the 
cure  of  poverty.  Indigence  there  is,  and  the  State  has  assumed 
the  duty  of  relieving  it.  The  modern  methods  of  relief  are  fast 
coming  to  be  as  economical  and  efficient  as  the  conditions  under 
which  they  are  necessarily  administered  admit.  Like  war,  this 
is  a  form  of  expenditure  that  shows  little  tangible  result  that 
can  be  measured  in  terms  of  money. 

The  general  principle  applied  in  the  granting  of  continued 
assistance  to  the  poor  is  that  the  cause  of  poverty  to  be  relieved 
must  be  such  that  it  cannot  be  removed  by  the  individual 
efforts  of  the  candidates  for  assistance.  In  other  cases,  only 
temporary  assistance  is  rendered.  Those  who  can  help  them- 
selves are  desired  to  do  so.  The  four  agencies  which  really 
work  together  toward  the  same  end  are  the  civil,  the  ecclesiasti- 
cal, the  associated,^  and  the  individual.  These  should  all  work 
harmoniously  and  should  avoid  dupHcation  of  work.  The 
assisted  persons  should,  so  far  as  possible,  be  put  under  condi- 
tions which  will  enable  them  to  help  themselves  to  the  limited 
extent  that  they  are  able.  The  repression  of  vagrancy  and  the 
punishment  of  wilful  paupers,  who  are  really  able  to  support 
themselves  but  unwilling  to  do  so,  is  left  to  the  courts. 

Mothers'  Pensions.  — The  care  of  orphaned  children  presents 
special  problems.  Orphans  neither  of  whose  parents  are  living 
and  who  have  no  relatives  who  can  support  them  are  cared  for 
either  in  public  homes  or  similar  institutions,  or  by  being  placed 

*  Essay,  p.  438. 

2  Associations  or  leagues  of  charitable  organisations. 


42  INTRODUCTION  TO  PUBLIC  FINANCE 

under  the  care  of  families.  In  the  first  place  this  is  always  at  the 
public  cost.  In  the  second  it  is  sometimes  at  pubUc  cost,  in 
whole  or  in  part.  Half  orphans  whose  fathers  are  living  are 
more  generally  left  to  the  support  of  the  fathers.  The  case 
of  widowed  mothers  with  minor  children  is,  however,  con- 
sidered as  presenting  special  problems.  The  mother  cannot 
well  care  for  the  child  or  children  if  she  goes  out  to  work.  It 
seems  harsh  and  probably  is  not  well  for  the  children  if  they  are 
separated  from  the  mother  and  placed  under  public  care.  A 
solution  has  been  found  in  giving  the  mother  sufficient  money 
from  the  pubHc  funds  to  support  herself  and  the  children  until 
they  grow  up. 

Insurance  and  Pensions.  —  Very  different  from  the  older  sort 
of  poor  relief  is  the  institution  of  old-age  pensions  on  the  insur- 
ance plan.     Such  institutions,  for  example,  as  the  German,  for 
compulsory   insurance,  premiums  being   collected   from   every 
worker,  may  be  made  self-supporting  and  in  time  promise  to 
relieve  the  State  of  a  part  of  the  burden  of  poor  relief.     Still 
different  in  principle  is  the  old-age  pension  system  adopted  in 
England  in  1908.     Under  this  system  it  is  provided  that  every 
man  or  woman  who  has  attained  the  age  of  seventy  years, 
and  who  has  been  a  British  subject  and  had  his  or  her  residence 
in  the  United  Kingdom  for  twenty  years,  and  whose  means  do 
not  exceed  £31  105.  (or  about  $150)  per  annum,  shall  be  entitled 
to  receive  a  pension  from  the  public  funds.     The  amount  of 
the  pension,  which  is  to  vary  with  the  private  income  of  the 
pensioner,  ranges  from  one  to  five  shilhngs  per  week.     Funds 
for  the  administration  and  for  the  payment  of  the  pensions  are 
to  be  provided   by   Parliament.     This   system   appears   to   a 
foreign  observer  to  amount  to  an  extension  of  the  relief  to 
some  persons  who  would  not  otherwise  receive  it,  and  to  a  trans- 
fer of  a  part  of  the  expense  from  the  local  to  the  central  govern- 
ment.    It  also  seems  to  take  away  some  of  the  stigma  that 
attaches  to  the  acceptance  of  poor  relief  under  the  old  system. 
In  the  years  1914,  1915,  1916,  and  1917  nearly  a  million  persons 
satisfied  the  requirements  and   the   cost   was   running   about 
£13,000,000  per  annum.     But  the  cost  of  poor  relief  was  stabi- 


EXPENDITURE  MAINLY  FOR  BENEFIT  OF  INDIVIDUALS     43 

lized  at  about  £18,000,000  with  a  diminishing  number  of  persons 
receiving  such  rehef. 

Insane  and  Criminal  Classes.  —  Modern  society  supports  the 
insane  and  criminal  classes  at  pubHc  cost.  In  this  way  the 
greatest  possible  saving  is  made.  Indeed,  the  cost  need  not 
be  nearly  as  great  as  it  is.  To  a  large  extent  prisons  can  be 
made  self-supporting.  It  is  perfectly  feasible  by  a  proper 
division  of  the  field  between  the  different  institutions  to  make 
the  prisons,  insane  asylums,  and  the  hke  entirely  self-sustaining. 
Hard  labour  is  frequently  a  part  of  the  criminal's  sentence ;  the 
less  violent  insane  can  be  made  to  work,  and  something  can  be 
got,  by  proper  supervision,  from  the  feeble-minded  and  the 
paupers.  By  an  exchange  of  products  between  the  different 
institutions  the  necessary  diversity  can  be  obtained.  There  is 
little  excuse  for  the  too  common  uselessness  of  the  labour  im- 
posed; the  tread-mill  and  oakum  picking  of  our  older  prison 
discipline ;  the  digging  of  unneeded  ditches  by  the  insane,  etc. 
Exchange  of  products,  too,  avoids  the  danger  of  conflicts  with 
the  labour  unions,  which  so  often  arise  when  a  prison  attempts 
to  make  a  product  for  sale  in  the  open  market.  This  expendi- 
ture is  very  closely  related  to  the  one  for  the  maintenance  of 
internal  peace  and  security.  The  burden  falls  mainly  upon  the 
finances  of  the  central  government,  or,  in  a  federal  State,  upon 
those  of  the  component  commonwealths.  The  policy  of  isolat- 
ing the  defective  classes,  the  insane  and  criminal,  the  deaf  and 
dumb,  the  feeble-minded,  and  the  like,  is  an  economy  for  society 
as  a  whole,  and  if  it  can  be  made  to  prevent  the  propagation 
of  these  weaknesses,  is  far-sighted. 

Hospitals.  —  Hospitals  for  the  sick  are  imperative  needs  in  the 
case  of  infectious  diseases ;  they  are  great  blessings  and  very 
desirable  from  the  standpoint  of  expediency  in  all  cases.  The 
opposition  occasionally  manifested  by  selfish  private  medical 
practitioners  to  public  hospitals  is  a  sufficient  proof  of  their 
economy.  Fortunately  the  modern  attitude  of  the  medical 
profession  is  strongly  for  preventive  measures  and  consequently 
favours  the  erection  and  support  of  hospitals.  Generally  this 
is  a  local  expenditure.     Certain  branches  of  the  government, 


44  INTRODUCTION  TO  PUBLIC  FINANCE 

like  the  military  and  the  naval,  have  generally  found  it  necessary, 
on  account  of  the  large  number  of  persons  in  their  employ,  to 
make  provision  by  hospitals  for  the  care  of  their  own  sick.  The 
maintenance  of  quarantine  stations  for  the  isolation  of  persons 
coming  from  infected  countries  or  districts  is  a  national  affair. 
Its  cost  may  at  times  rise  to  a  considerable  amount.  But 
there  is  no  question  as  to  its  necessity  and  economy.  In  the 
United  States  there  are  arrangements  for  quarantine  between 
the  different  States,  partly  at  the  cost  of  the  federal  govern- 
ment and  partly  at  that  of  the  commonwealths.  Quarantine 
against  plant  and  animal  diseases  is  similar  in  character,  and 
the  expense  is  met  in  similar  ways. 

Sec.  2.  Pensions.  —  Old-age  pensions  for  officials  whose 
lives  have  been  spent  in  the  public  service,  or  for  soldiers  whose 
health  has  suffered,  for  the  good  of  all,  are  but  the  proper 
recognition  of  those  services.  They  may  be  regarded  as  sums  re- 
served from  the  wages  from  year  to  year  and  paid  over  in  this 
form.  In  that  case  this  expenditure  should  be  placed  under  class 
one.  This  is  the  case  with  most  of  the  pensions  in  England, 
and  there  they  are  generally  correctly  classed  under  the  expendi- 
ture for  the  departments  to  which  the  men  pensioned  belonged 
before  they  retired.  But  when  this  expenditure  becomes, 
as  it  was  in  the  past  in  too  large  measure  in  America,  a  means  of 
reward  for  political  services  rendered  to  candidates  for  public 
office,  it  cannot  be  placed  anywhere  but  in  class  two,  being 
then  an  expenditure  for  the  benefit  of  certain  persons  considered 
as  though  it  were  for  the  benefit  of  all.  The  rapid  increase  of 
expenditure  for  this  purpose  in  the  United  States,  as  well  as 
the  curious  features  of  that  increase,  show  that  it  cannot  all  be 
justified  by  any  rule  of  economy.  In  this  country  only  soldiers 
are  pensioned.  Under  general  laws,  which  require  only  that 
there  shall  be  sufficient  proof  that  the  applicant  is  entitled  to  a 
pension,  all  those  who  base  their  claims  on  inability  to  work  or 
excellent  services  are  pensioned.  But  many  others  have  been 
pensioned  by  special  acts  of  Congress.  The  abuse  of  the  system 
ceased  about  1900,  although  the  pensions  granted  before  that 
still  continue.     The  amount  of  pensions  increased  after  the 


EXPENDITURE  MAINLY  FOR  BENEFIT  OF  INDIVIDUALS     45 

Civil  War,  rapidly  but  irregularly.  The  Spanish  War  brought 
new  pensioners  into  the  ranks  and  the  decline  in  pension  costs 
was  checked.  In  1918  the  allowances  were  increased  and  the  total 
expended  in  that  year  reached  $222,000,000,  the  largest  sum 
ever  paid. 

War  Insurance. — To  avoid  the  notorious  evils  of  the  old 
pension  system  a  new  plan  was  adopted  at  the  very  entry  of 
the  United  States  into  the  World  War.     That  plan  was  based 
on   the   principles   of   compensation   insurance.     In   brief   the 
government  undertook  at  its  own  risk  and  expense  to  insure  the 
soldiers  against  death   or  disabihty  arising  directly  from  or 
during  military  service.     In  the  event  of  death  the  widow  is  to 
receive  a  fixed  sum  each  month  for  the  remainder  of  her  life 
or  until  remarriage,  and  if  there  are  children  fixed  sums   are 
allowed  to  them  until  they  reach  the  age  of  eighteen.     In  case 
of  total  disability  the  soldier  himself  receives  compensation, 
larger  amounts  being  allowed  if  he  has  a  family.     In  the  case 
of  partial  disability  compensation  is  proportioned  to  the  reduc- 
tion in  earning  capacity.     The  government  undertakes  to  care 
for  and  medically  treat  all  disabled  with  a  view  to  their  restora- 
tion to  full  earning  capacity  if  possible.     To  be  recognised  as 
compensable  death  or  disability  must  occur  while  in  service 
or  within  one  year  after  discharge  or  resignation. 

In  addition  the  government  sold  regular  life  insurance  to  the 
soldiers.  Since  the  government  itself  assumed  all  strictly 
war  risks  and  paid  all  administrative  expenses  this  insurance 
was  at  relatively  low  premium  rates. 

The  Proper  System  of  Retirement  Pensions  for  Public  Ser- 
vants. —  It  seems  necessary  that  public  servants  should  have 
means  of  support  when  they  retire  on  account  of  old  age  or 
disability.  Since  public  salaries  are  rarely  large  enough  to 
admit  of  much  saving  some  kind  of  retiring  pensions  seem 
appropriate.  Grave  practical  difficulties  arise  in  inaugurating 
such  a  system  where  there  are  a  body  of  officers  already  in  the 
service  for  whom  no  provision  has  been  made.  It  means  a 
sudden  large  increase  in  the  cost  of  the  pubhc  service.  Assum- 
ing that  this  difficulty  can  be  overcome  the  choice  lies  between 


46  INTRODUCTION  TO  PUBLIC  FINANCE 

a  so-called  free  pension  system,  and  one  supported  by  annual 
premiums  collected  from  those  who  are  in  line  for  retirement. 
Probably  in  the  long  run  the  two  are  much  alike.  For  probably 
even  if  a  so-called  free  pension  is  established  the  salaries  will 
be  lower  by  reason  of  the  pension  promised.  Since  under 
either  plan  the  ofiicer  pays  for  his  pension  in  annual  instal- 
ments or  premiums,  it  is  only  just  that  he  should  have  a  definite 
contract  personal  to  him.  It  is  not  just,  if  he  leaves  that  service 
before  reaching  the  age  of  retirement,  that  he  thereby  lose  the 
value  at  date  of  resignation  of  the  accumulated  premiums, 
whether  he  has  paid  them  in  money  or  by  accepting  a  lower  sal- 
ary. But  that  in  turn  requires  that  the  government  shall  keep 
proper  reserves,  just  as  an  insurance  company  which  sells  annuity 
policies  would  have  to  do.  Conducted  in  this  way,  once  the 
initial  costs  are  met,  a  pension  system  is  self-sustaining  and 
means  only  a  relatively  small  regular  annual  outlay.  The 
initial  cost  may  be  regarded  as  restitution  of  moneys  of  which 
the  public  servants  have  been  unjustly  deprived  in  the  past. 
But  one  danger  must  be  held  in  mind.  Pensions  on  this  plan 
are  in  essence  annuity  insurance.  The  premiums  or  reserves 
have  to  be  calculated  on  the  basis  of  the  ordinary  mortality 
tables.  But  these  involve  the  assumption  that  the  number 
insured  shall  be  large  enough  to  make  the  law  of  averages  a  safe 
guide.  A  small  city  with  only  a  few  hundred  school  teachers 
and  other  officers  cannot  very  well  assume  that  the  law  of 
averages  will  be  lived  up  to  by  its  pensioners.  The  plan  re- 
quires at  least  a  hundred  thousand  in  the  group  of  pensioners, 
and  that  means  that  it  can  be  conducted  only  by  a  govern- 
mental unit  of  large  size.  Provisions  similar  to  those  which 
are  here  indicated  for  retirement  pensions  may  be  used  to  cover 
disability  as  well,  and  both  may  be  cared  for  in  one  general 
system. 

Sec.  3.  Workmen's  Compensation.  —  Another  and  a  dif- 
ferent application  of  the  insurance  principle  is  the  establish- 
ment of  so-called  workmen's  compensation.  We  cannot 
properly  discuss  the  whole  problem,  but  shall  discuss  the  gov- 
ernment's part  only.     Industry  exposes  workmen  to  accidents 


EXPENDITURE  MAINLY  FOR  BENEFIT  OF  INDIVIDU.\LS     47 

which  may  result  in  loss  of  life  or  in  disability.  If  this  burden 
is  left  on  the  individual  who  suffers  the  accident  or  on  his  family, 
it  is  often  a  crushing  one.  It  has  been  found  that  neither  the 
workmen  nor  the  employers  can  safely  be  trusted  to  guard 
against  this  hazard  by  private  insurance.  Government  must 
step  in  and  compel  the  provision  by  insurance  of  compensation 
in  case  of  industrial  accidents.  In  the  most  successful  systems 
the  government  fixes  the  rates  of  compensation.  It  may  estab- 
lish its  own  compensation  bureau  or  quasi  insurance  company 
to  carry  the  risk,  collecting  annual  premiums  to  cover  the  losses. 
It  may  content  itself  with  fixing  compensation  rates  and  adjudg- 
ing the  amounts  due  in  each  case  and  compel  the  employer  to 
pay  the  compensation.  This  would  practically  force  the  em- 
ployer to  insure  with  some  commercial  company.  Sometimes 
the  government  does  both,  and  by  setting  up  its  own  insurance 
bureau  regulates  by  competition  the  conduct  of  this  business 
by  the  commercial  companies.  When  properly  conducted  such 
a  competitive  government  bureau  is  more  effective  in  regulating 
the  rates  of  insurance  than  direct  regulation  or  prescription  of 
rates  would  be.  Joined  with  compensation  there  is  usually 
found  the  enforced  use  of  safety  appliances  and  other  methods 
of  preventing  accidents.  This  whole  movement  is  one  of  the 
greatest  advances  of  recent  years. 

Sec.  4.  Bounties  and  Protection.  —  Under  this  class  be- 
longs also  that  expenditure  which  is  made  for  the  development 
of  industry  by  bounties  and  the  protection  of  home  industries 
against  foreign  competition.  The  latter  expenditure  differs 
from  the  former  only  in  that  the  sums  spent  do  not  pass  through 
the  hands  of  the  officers  of  the  treasury.  The  recipients  of  this 
assistance  collect  it  directly  from  the  contributors  in  the  shape 
of  higher  prices  for  their  wares  than  would  otherwise  prevail. 
With  the  economic  side  of  this  expenditure,  and  the  possibility 
or  impossibility  of  adding  permanently  to  the  wealth  of  a  na- 
tion by  this  process,  public  finance  has  nothing  to  do.  But  as 
many  important  nations  practise  this  form  of  expenditure,  we 
cannot  avoid  at  least  a  statement  of  its  character.  The  rev- 
enues derived  by  the  government  from  taxes  on  the  commod- 


48  INTRODUCTION  TO  PUBLIC   FINANCE 

ities  actually  imported  will  be  considered  in  Part  II.  But  so 
far  as  any  actual  "protection"  is  afforded  the  home  producer, 
it  is  an  item  of  expenditure.  In  effect  it  is  practically  the  same 
as  if  a  subsidy  or  bounty  were  paid  to  the  producers  out  of 
taxes  collected  from  the  consumers  of  the  goods  in  question. 
This  expenditure  is  made  not  so  much  in  the  hope  of  increasing 
the  total  wealth  of  the  nation  directly  as  in  the  hope  of  obtain- 
ing a  greater  diversity  of  products,  so  that  in  the  end  the  effect 
will  be  to  increase  the  wealth,  mdirectly,  by  allowing  for  a 
greater  division  of  labour,  and  consequently  for  more  steady 
and  efficient  production.  This  policy  has  nowhere  been  begun 
as  a  permanent  one,  but  one  of  its  results  is  the  growth  of  power- 
ful vested  interests  which  make  for  permanence.  Thus  boun- 
ties are  paid  directly  from  the  treasury,  or  protection  is  afforded 
to  industries  which  it  is  hoped  will  eventually  be  self-supporting, 
but  which  are  not  so  at  the  time.  At  different  times  circum- 
stances have  caused  this  policy  to  be  supported  by  different 
arguments.  Practically  all  the  most  important  arguments  have 
been  used  at  different  times  in  the  United  States,  where  pro- 
tection has  prevailed  with  scarcely  a  break  from  1816  to  1909. 
The  oldest  of  those  arguments  is  known  as  the  "  infant  indus- 
tries argument."  It  is  urged  that  new,  weak  industries  cannot 
hope  to  hve  if  subject  to  the  competition  of  older  foreign  indus- 
tries. At  the  same  time  it  is  maintained  that  in  case  of  war  it 
would  be  practically  necessary  for  a  country  to  be  able  to  supply 
all  its  own  needs.  This  grows  directly  into  the  argument  of 
List,  which  is  in  the  main  to  the  effect  that  a  nation's  pros- 
perity, in  general,  depends  not  so  much  upon  the  mass  of  wealth 
produced  as  upon  the  greatest  possible  diversity  of  its  indus- 
tries, so  as  to  develop  aU  possible  phases  of  its  national  produc- 
tion. Just  as  the  human  body  is  healthier  when  all  the  muscles 
are  uniformly  developed  than  when  a  few  are  abnormally 
strong,  so,  it  is  argued,  a  nation  is  more  truly  prosperous  when 
all  its  productive  forces  are  moderately  active  than  when  its 
entire  force  is  expended  in  a  few  lines.  Later  comes  the  patri- 
otic or  "  home  market  "  argument,  which  urges  that  the  home 
producer  has  a  claim  on  the  custom  of  the  home  consumer. 


EXPENDITURE  MAINLY  FOR  BENEFIT  OF  INDIVIDUALS     49 

Finally  this  argument  has  been  developed  in  the  United  States 
into  the  famous  ''  pauper  labour  "  argument,  and  it  is  main- 
tained that  the  home  producer  has  been  enabled  to  pay  his 
workmen  higher  wages  than  the  same  classes  of  workmen  re- 
ceive in  foreign  countries,  on  account  of  protection,  and  that  to 
remove  that  protection  would  be  to  reduce  the  home  workmen 
to  the  standard  of  life  of  the  foreigners.  This  latter  argument 
is  largely  an  appeal  to  class  interests  for  votes  and  is  not  wholly 
tenable.  The  infant  industries  argument,  it  is  generally  ad- 
mitted, is  incontestable.  The  strongest  argument  in  favour  of 
the  continuance  of  this  subsidising  of  industries  has  been  devel- 
oped from  that  of  List.  This  may  be  restated  somewhat  as 
follows :  if  the  productive  energy  of  a  nation  has  but  a  few 
outlets,  as  in  exploiting  natural  advantages,  there  is  a  great 
danger  that  the  nation's  economic  life  may  become  stagnant. 
If,  however,  production  be  diversified,  even  by  an  artificial 
process,  it  is  much  easier  to  keep  the  current  of  productive 
energy  in  motion,  allowing  it  to  be  turned  in  whatever  direction 
new  advantages  may  open  up. 

In  England,  which  has  for  many  years  been  regarded  as  the 
"  classical  home  of  free  trade,"  there  has  recently  been  a  revival 
of  sentiment  in  favour  of  protection.  But  this  movement  has 
not  resulted  in  establishing  a  protective  system  in  that  country. 
The  reasons  for  the  revival  of  protectionist  sentiment  are  the 
difficulty  of  furthering  trade  relations  with  countries  practising 
protection  and  whose  home  markets  are  supplied  by  protected 
manufactures,  and  the  desire  for  closer  trade  relations  with  the 
colonies. 

While  it  may  be  admitted  that  there  is  great  force  in  the 
arguments  in  its  favour,  it  must  be  remembered  that  protection 
is  very  heavy  expenditure,  not  less  heavy  because  it  is  hard  to 
estimate  its  amount.  There  is  a  practical  limit  set  by  the 
wealth  of  the  people  to  the  possible  amount  of  expenditure  in 
this  direction.  If  this  process  places  too  heavy  a  burden  on 
the  nation's  annual  wealth  increment,  the  burden  will  not  be 
borne,  and  the  end  defeated.  Again,  if  the  "protected"  infant 
industries  finally  outgrow  the  need  of  subsidies,  and  fix  prices  by 


50  INTRODUCTION   TO   PUBLIC   FINANCE 

competition,  the  drain  upon  the  resources  of  the  country  ceases. 
If  they  do  not,  the  subsidising  process  may  continue  so  long  as 
the  general  mass  of  the  wealth  is  not  thereby  too  seriously  cur- 
tailed. A  nation  may  be  able  to  pay  for  diversification  of 
industries,  just  as  it  may  be  able  to  pay  for  schools,  for  parks, 
for  museums,  for  libraries,  etc.  But  the  limit  of  such  expendi- 
ture is  set  by  what  the  nation  can  afford.  This  Hmit  is  too 
frequently  overlooked ;  it  is  too  often  forgotten  that  all  protec- 
tion is  public  expenditure.  No  "  protection  "  is  afforded  unless 
the  price  is  raised.  The  difference  between  the  price  that  would 
have  prevailed  and  the  price  that  does  prevail  is  the  amount 
the  nation  spends  for  this  purpose.  This  is  not  offset  by  any 
direct  gain  in  wealth,  and  can  only  be  justified  by  the  desira- 
bility of  having  a  diversity  of  industries. 

Sec.  5.  Expenditure  for  the  Administration  of  Justice.  — 
We  now  come  to  those  expenditures  that  are  treated  as  confer- 
ring a  benefit  divided  between  the  particular  individual  who 
pays  for  what  he  gets,  and  the  people  as  a  whole  who  pay  in  the 
general  taxes  for  the  general  or  common  benefit.  The  first  and 
oldest  of  these  is  the  expenditure  for  the  courts.  The  adjudica- 
tion of  disputes  between  different  persons  was  one  of  the  earliest 
functions  of  government.  The  payment  of  the  costs  was 
originally  thrown  upon  the  suitors.  But  modern  governments 
conceive  that  it  is  in  the  common  interest  to  have  justice  uni- 
versally administered.  Upon  the  general  and  accurate  admin- 
istration of  justice  depends  in  great  measure  the  prosperity  of 
business.  But  either  as  a  preventive  of  too  frequent  litigations 
or  on  account  of  the  special  benefit  supposed  to  accrue  to  the 
suitor,  the  costs  are  divided,  and  one  part  paid  by  the  people, 
the  other  —  a  minor  part — ^by  the  suitor.  In  criminal  cases  the 
whole  cost  practically  falls  on  the  State ;  in  civil  cases  the 
attempt  is  generally  made  to  assess  the  cost  upon  the  party  at 
fault.  A  large  part  of  the  local  administration  of  justice  in 
England  is  rendered  without  emolument  by  the  Justices  of  the 
Peace.  Besides  the  mere  deciding  of  disputes  and  of  criminal 
cases,  the  judicial  departments  perform  other  legal  functions 
of  importance,  as,  for  example,  the  probating  of  wills,  the  dis- 


EXPENDITURE  MAINLY  FOR  BENEFIT  OF  INDIVIDUALS     51 

posing  of  property  of  intestates,  etc.  Somewhat  similar  legal 
functions  are  performed  for  the  special  benefit  of  the  individual 
citizens  by  the  administrative  branches  of  the  government,  as 
registration  and  legalising  of  deeds,  mortgages,  marriages,  and 
other  contracts,  the  granting  and  registration  of  copyrights, 
trade-marks,  patent  rights,  corporation  rights,  etc. 

In  the  United  States  the  courts  have  developed  a  number  of 
quasi-legislative  and  administrative  functions  of  great  impor- 
tance. As  the  interpreters  of  the  federal  and  commonwealth 
constitutions,  they  have  had  to  meet  new  conditions,  and  indi- 
cate the  bearing  of  the  constitutions  thereon.  They  have  often 
been  called  upon  to  interpret  the  meaning  of  constitutional 
customs  that  have  grown  up  outside  of  the  written  documents, 
and  have  in  this  way  given  those  customs  a  certain  degree  of 
legal  prominence.  They  were  formerly  in  some  of  the  common- 
wealths (following  an  old  English  custom)  allowed  to  determine 
the  local  tax  levy  or  apportionment.  Quite  recently,  by  the  use 
of  injunctions,  they  have  exercised  a  sort  of  administrative 
control  over  industry,  especially  as  affects  the  relations  of  em- 
ployers and  employees  in  industrial  monopolies  of  public 
importance,  as,  for  example,  common  carriers.  In  the  control 
of  municipal  corporations,  both  by  punishing  illegal  acts  and 
compelling  due  compliance  with  discretionary  duties,  they  have 
largely  performed  the  functions  exercised  by  the  administrative 
departments  in  Europe.'  In  all  this  work  they  are  considered 
as  acting  for  the  common  benefit. 

Sec.  6.  Betterment  of  Property,  etc.  —  Other  functions 
that  are  similarly  treated  need  but  to  be  enumerated.  Among 
them  are  the  laying  out  and  grading  of  streets,  building  of 
sewers  for  the  benefit  of  all  the  citizens,  and  the  special  "  better- 
ment "  of  the  property  of  abutting  landowners.  The  division 
made  here  is  generally  that  the  first  cost  is  assessed  to  the 
specially  benefited  persons,  the  subsequent  costs,  maintenance, 
etc.,  to  the  people  generally.  The  supply  of  water  is  similarly 
treated  in  many  cities.  One  of  the  best  examples  of  this  sort  of 
expenditure  is  that  of  the  post-otfice,  as  managed  in  the  United 
'  See  Goodnow,  Municipal  Home  Rule. 


52  INTRODUCTION  TO   PUBLIC   FINANCE 

States.  This  service  is  almost  entirely  treated  as  conferring 
a  special  benejfit  on  the  users.  A  part  of  the  cost  of  the  dis- 
tribution of  newspapers  within  the  county  in  which  they  are 
published  is  treated  as  a  public  benefit.  In  some  countries  the 
post-office  is  so  managed  as  to  yield  a  surplus,  in  which  case  it 
passes  into  class  four. 

Sec.  7.  State  Industry.  —  Expenditures  of  class  four  are 
part  of  the  gross  expenditure  only.  When  a  State  spends 
money  in  wages  and  in  the  purchase  of  a  plant  and  raw  materials 
for  the  production  of  porcelain  and  the  like,  it  expects  to  get 
it  all  back  again  from  the  sale  of  the  commodities.  The  same 
is  true  of  a  city  maintaining  a  gas  plant,  of  a  State  railroad,  etc. 
Originally,  the  State  made  use  of  public  lands,  forests,  mines, 
etc.,  as  a  source  of  income,  but  now  there  are  a  great  many 
industries  and  enterprises  which  the  State  conducts  more  for 
a  public  purpose  than  for  the  gain  to  the  public  treasury.  A 
city  does  not  operate  its  street  railways  primarily  as  a  source  of 
income,  but  to  guarantee  the  citizen  good  and  cheap  service. 
Hence  the  gross  expenditure  for  this  purpose  is  a  very  important 
item.     It  is  growing  to  be  more  and  more  so  as  time  goes  on. 

Some  of  the  more  important  industries  that  the  State  carries 
on  are  for  the  purpose  of  supplying  itself  with  certain  commodi- 
ties, as  arms,  ammunition,  war-ships,  and  the  like.  Such  in- 
dustries are  carried  on  from  the  highest  branches  of  the  govern- 
ment down  to  the  lowest.  We  find,  for  example,  many  Ameri- 
can towns  supplying  a  part  of  the  support  of  the  inmates  of  their 
public  institutions  by  cultivating  the  lands  of  the  poor-farms. 

Some  of  the  most  striking  instances  of  such  industrial  ex- 
penditure are  connected  with  communication  and  transport, 
and  with  those  industries  the  management  of  which,  on  ac- 
count of  the  tendency  to  monopoly,  is  frequently  put  into 
public  hands.  Examples  of  this  are  numerous  among  those 
already  mentioned.  Many  industries  have  been  at  different 
times  and  places  so  managed  as  to  cost  more  than  they  brought 
in.  That  is,  they  have  resulted  in  a  net  deficit,  not  a  net  profit. 
They  thus  pass  into  class  three. 

A  rather  significant  list  of  enterprises  has  in  modern  times 


EXPENDITURE  MAINLY  FOR  BENEFIT  OF  INDIVIDUALS     53 

been  entered  upon  by  the  State,  which  might  be,  but  are  not, 
managed  so  as  to  yield  a  revenue  that  offsets  their  cost.  These 
are  museums,  libraries,  parks,  baths,  and  the  Hke.  They  belong 
under  class  one. 

Sec.  8.  Expenditures  Directly  for  Human  "Welfare.  —  Since 
about  1900  there  has  been  a  movement,  growing  in  strength,  to 
bend  the  activities  of  government  more  to  the  care  of  human 
beings  directly  than  to  the  mere  improvement  of  their  environ- 
ment or  economic  well-being.  A  common  criticism  of  govern- 
ment expenditure  has  been  expressed  as  "  spending  more  money 
to  secure  good  litters  of  pigs  than  to  promote  the  welfare  of 
human  beings."  The  resultant  legislation  has  given  to  govern- 
ment some  new  activities.  Among  them  may  be  mentioned: 
increased  provision  for  health  and  sanitation ;  pure  food  and 
drug  laws  including,  especially,  pure  milk,  and  better  enforce- 
ment of  such  laws ;  supervision  and  care  of  the  physical  well- 
being  of  school  children ;  safety  appliance  requirements  in  fac- 
tories and  workshops ;  increased  provision  for  recreation,  sport, 
and  exercise ;  community  medical  service,  which  as  yet  is  only 
an  expansion  of  the  older  hospital  service,  although  it  promises 
to  become  different  and  more  important  as  various  forms  of 
social  insurance  increase.  All  of  these  activities  trench  upon 
the  freedom  of  the  individual  in  ways  that  sometimes  become 
irksome.  The  safe  middle  course  between  the  meddlesomeness 
of  the  infatuated  reformer,  and  the  genuine  helpfulness  of  a 
true  public  service  has  yet  to  be  found.  The  most  hopeful 
feature  of  this  new  departure  is  the  discovery  that  the  pubHc 
will  make  use  of  new  knowledge  and  of  new  facilities  freely 
without  compulsion. 


PART    II 

PUBLIC    REVENUES 
CHAPTER  I 

THE   CHARACTER   AND    CLASSIFICATION    OF   PUBLIC 

REVENUES 

Section  i.  The  State  Requires  Services  and  Commodities. 
—  German  writers  on  public  finance  generally  begin  the  dis- 
cussion of  revenues  with  the  statement  that  the  State  requires 
services  and  commodities.  The  services  are  furnished  by  the 
citizens ;  in  primitive  communities  freely,  by  all,  in  virtue  of 
membership  in  the  State,  later  by  particular  ones  who  are  paid 
for  them.  The  commodities  or  wealth  required  may  be  pro- 
duced by  the  State  or  taken  from  the  citizens.  In  the  ancient 
primitive  community,  services  are  rendered  by  the  citizens 
as  their  proper  contribution  to  the  State.  The  commodities 
needed  are  for  the  most  part  furnished  by  the  individuals  with- 
out any  recognition  of  a  transfer  of  ownership  to  the  State. 
The  division  of  labour  necessary  for  the  successful  adminis- 
tration of  more  complex  aft'airs  of  the  modern  State  demands 
a  separation  of  the  persons  permanently  in  the  service  of  the 
State  from  the  other  classes.  These  must  then  be  supported 
from  somewhere,  and  in  classical  times  this  is  accomplished  by 
giving  the  State,  or  what  is  the  same  thing  in  classic  thought, 
its  special  officers,  the  income  from  certain  sources,  as  mines  or 
productive  enterprises,  and  taxes  upon  tributary  peoples,  or 
certain  inferior  classes  of  citizens.  Out  of  these  funds  the 
public  officers  were  supported,  and  those  in  the  service  of  the 
State  who  were  paid  for  their  services  were  maintained. 

Again,  in  the  Middle  Ages,  feudalism  furnished  a  mode  of 
support  for  public  officers  by  giving  them  a  certain  control  over 

54 


THE   CLASSIFICATION  OF  PUBLIC   REVENUES  55 

land  and  its  occupants.  This  was  a  means  which,  without  the 
use  of  money,  provided  services  and  commodities  for  the  pubhc 
needs. 1  But  later  as  money  became  more  plentiful,  and  in 
ordinary  transactions  payments  in  kind  and  in  services  were 
commuted  into  payments  in  money,  the  government  in  turn 
commuted  services  due  into  money  payments.  At  the  same 
time,  lands  originally  conveyed  to  public  officers  in  considera- 
tion of  their  public  services,  and  to  enable  them  to  perform  those 
services,  passed  absolutely  into  their  control  and  were  treated, 
in  part  at  least,  as  their  private  property,  and  the  services  and 
commodities  they  yielded  became  the  private  income  of  those 
individuals  and  their  families.  But  although  the  revenues 
from  the  domains,  retained  in  this  same  way  by  those  families 
which  became  the  sovereigns,  were  still  applied  to  public  ex- 
penses, they  soon  became  insufficient,  as  the  State's  functions 
grew,  and  other  resources  were  sought.  In  the  mad  scramble 
for  public  revenues,  old  rights  to  dues  and  services  were  tena- 
ciously retained  by  rulers  or  their  officers.  Especially  were  the 
claims  to  military  and  similar  general  services  held.  These 
claims,  too,  were  finally  commuted  into  money  payments, 
which  became  compulsory  just  as  the  services  from  which  they 
were  derived  had  been  compulsory. 

Voluntary  Payments.  —  The  names  used  for  the  first  rev- 
enues, which  differed  from  the  receipts  from  domains  and  the 
customary  services,  show  very  distinctly  the  voluntary  char- 
acter of  the  payments.  They  are  called  beggings,  requests, 
gifts  {beden,  petitiones,  benevolences,  dona),  or  from  the  point  of 
view  of  the  assistance  given,  aids  {aide,  steuer)?  With  the 
gradual  growth  of  the  needs,  for  which  these  demands  were 
made,  into  permanent  needs,  with  the  further  centrahsation 
and  concentration  of  the  public  functions,  with  the  neglect  of 
public  duties  by  the  feudal  lords,  and  by  the  quasi-public 
officers  quartered  on  the  land,  and  with  the  consequent  perform- 
ance of  these  duties  by  the  government,  the  demands  upon  the 
people  became  permanent  and  compulsory. 

'  Maine,  Early  Law  and  Custom,  p.  148. 
*  Seligman,  Essays,  pp.  6-7. 


56  INTRODUCTION  TO  PUBLIC   FINANCE 

Sec.  2.  Effect  of  Constitutionalism.  —  Since  the  emergence 
of  the  monarchical  State  from  feudaHsm,  the  trend  of  public 
finance  has  been  directed  by  the  growth  of  constitutionalism,  — 
or  the  representation  of  the  people  in  the  government.  As  the 
whole  advance  of  this  movement  turned  upon  the  success  of 
the  people  in  obtaining  the  control  of  the  purse,  it  is  evident 
that  the  resulting  changes  in  the  financial  system  must  have 
been  very  important.  The  long  history  through  which  the  dif- 
ferent revenues  have  passed,  the  necessity  of  constant  com- 
promise between  the  different  interested  parties,  and  the  various 
changes  made  necessary  by  the  growth  in  the  economic  life  of 
the  world,  all  these  have  left  modern  States  with  a  most  con- 
fused jumble  of  revenues.  Yet  with  all  the  irregularities  and 
anomalies  that  can  be  found  in  the  revenues  of  any  modern 
State,  there  is  still  in  every  case  a  more  or  less  clearly  traceable 
systematic  development.  This  growth  of  system  is  clearly  due 
to  the  work  of  the  representatives,  in  whose  hands  the  develop- 
ment of  constitutional  government  finally  placed  the  control 
of  the  collection  and  spending  of  the  public  money.  As  these 
representatives  realised  the  need  of  revenues,  they  naturally 
sought  for  some  principles  of  right  and  justice  to  guide  them  in 
the  choice  of  sources.  The  result  has  been  a  partial  uniformity 
in  the  systems  of  the  different  countries. 

It  should  not,  however,  be  imagined  that  this  uniformity  is 
very  great,  nor  that  the  systems  of  the  different  countries  are 
alike  in  details.  But  somewhat  the  same  fundamental  ideas 
seem  to  underlie  all.  There  are  also  great  differences.  Thus 
one  country  chooses  to  obtain  the  larger  part  of  its  revenues 
from  a  tax  not  used  at  all  in  another.  Historical  practices  and 
differences  in  the  frame  of  government  necessitate  modifica- 
tions, even  of  the  same  principle.  That  bugbear  of  the  student 
of  public  finance,  practical  expediency,  which  has  ruined  many 
a  fine  theory,  works  in  the  most  astonishing  ways  to  prevent  the 
execution  of  approved  principles. 

Sec.  3.  The  Justification  of  Taxation.  —  The  uniformity 
above  noted  came  about  as  a  natural  result  of  the  general 
search  by  the  agents  of  constitutional  government  for  some 


THE  CLASSIFICATION  OF   PUBLIC   REVENUES  57 

good  reason  why,  in  each  case,  the  particular  person  contribut- 
ing should  be  called  upon  to  do  so.  As  the  representatives  of 
the  people,  they  naturally  had  to  satisfy,  in  some  way,  the 
reasonable  desire  of  the  people  for  some  clearly  defined  method 
of  apportionment.  As  it  is  generally  hard  enough  to  convince 
men  of  the  need  of  contributing  anything,  the  plea  put  forth 
must  be  a  strong  one.  If  we  confine  our  attention,  for  the 
purposes  of  illustration,  to  taxes  alone,  which  are  the  hardest 
of  all  revenues  to  justify,  we  can  see  more  clearly  how  the 
necessity  of  thus  showing  good  reasons  led  to  uniformity.  It 
is  exddent  that  if  the  representatives  had,  for  instance,  informed 
their  constituents  that  "  taxes  are  one-sided  transfers  of  eco- 
nomic goods  or  services,"  ^  they  would  have  had  considerable 
difficulty  in  getting  consent  to  any  taxes.  But  when  they 
announced,  "  taxes  are  paid  in  return  for  the  benefits  conferred 
upon  you  by  the  government,"  it  was  easier  to  collect  them. 
When  they  proceeded  to  assess  taxes  on  the  basis  of  a  more  or 
less  definite  attempt  to  measure  the  benefit  conferred,  or  where, 
in  the  nature  of  things,  an  actual  measurement  was  impossible 
on  some  other  basis  of  supposed  equality,  they  clearly  had  a 
very  good  case  to  present  to  their  constituents.  It  requires 
but  the  slightest  knowledge  of  the  history  of  constitutional 
legislative  bodies  to  prove  conclusively  that  such  was  the 
process  of  reasoning.  And  this  fully  accounts  for  the  simi- 
larity of  the  systems  of  various  countries. 

Whenever  it  was  perfectly  clear  that  a  certain  function  con- 
ferred a  special  benefit  on  an  individual  citizen,  the  charge  was 
made  on  him,  and  those  persons  not  so  clearly  benefited  were 
wholly  or  partially  exempt.  Thus  we  have  the  practice  of  taking 
tolls  from  persons  using  the  roads,  of  collecting  fees  from  the 
suitors  at  court,  or  making  a  sale  of  some  privilege  or  com- 
modity to  the  citizens  for  a  price,  as  in  the  case  of  granting 
a  monopoly,  or  the  sale  of  manufactured  wares,  or  of  lumber,  or 
ore  from  the  domains.  But  many  of  the  more  important 
functions  do  not  result  so  clearly  in  a  special  benefit  to  the 
individual,  and  recourse  is  had  to  some  other  mode  of  justi- 
•  Part  of  the  definition  of  taxes  by  Professor  Ely,  pp.  6,  7. 


58  INTRODUCTION  TO  PUBLIC   FINANCE 

fication.  At  first,  naturally,  the  older  ideas  are  developed. 
The  services  traditionally  due  from  the  citizen  to  the  State,  of 
which  that  of  military  service  is  the  most  prominent  example, 
are  recalled  and  appealed  to.  It  is  claimed  that  money  should 
be  given  in  commutation  of  these  services.  Then  the  ground 
is  shifted  again  and  again,  and  many  apparently  different 
reasons  are  advanced.  But  in  all  these  changes  one  thing  is 
clear,  — •  the  shifting  of  argument  is  made  in  order  to  enable 
the  use  of  some  new  measure  of  the  amount  of  taxation,  and  at 
basis  the  justification  remains  practically  the  same.  The  citi- 
zen is  asked  to  pay,  because  he  shares  in  the  benefits  common 
to  him  and  his  fellows.  But  this  common  benefit  does  not 
suggest  any  particular  measure. 

Sec.  4.  Compulsion  a  Universal  Feature.  —  Another  point 
of  similarity  between  different  nations  must  be  studied  histori- 
cally ;  that  is  the  feature  of  compulsion.  This  feature  is  old  and 
universal.  It  is,  perhaps,  older  than  any  one  of  the  nations 
and  began  in  that  feudal  system  from  which  they  emerged. 
The  citizen  had  to  be  compelled  to  render  his  service  to  the 
State,  whenever  the  special  benefit  to  him  was  not  clear.  That 
feature  the  most  advanced  constitutional  governments  have 
retained.  There  have,  to  be  sure,  been  instances  where  States, 
and  especially  cities,  have  had  recourse  to  voluntary  contribu- 
tions to  meet  the  expenses  giving  a  special  benefit.  But  these 
soon  passed  into  compulsory  contributions.  A  fine  example  of 
the  development  of  a  voluntary  contribution  into  a  tax  is  found 
in  the  English  poor-rate.  In  the  twenty-seventh  year  of  the 
reign  of  Henry  VIII,  1536,  collections  were  made  for  the  impo- 
tent poor  (voluntary).  In  the  first  Edward  VI,  1547,  bishops 
were  authorised  to  prosecute  all  who  refused  to  contribute  for 
this  purpose  (compulsion  enters).  In  the  fifth  Elizabeth,  1563, 
the  justices  of  the  peace  were  made  judges  of  what  constituted  a 
reasonable  contribution  (compulsion  as  to  the  amount).  And 
from  the  fourteenth  Elizabeth,  1572,  regular  compulsory  con- 
tributions were  levied,  and  so  they  have  continued. 

Sec.  5.  Classification  of  Revenues.  — ■  We  have  already 
classified  expenditures  according  to  the  character  of  the  benefit 


THE  CLASSIFICATION  OF   PUBLIC   REVENUES  59 

conferred.^  Now  the  almost  uniform  practice  is  to  collect  com- 
pulsory revenues  from  all  the  citizens  for  those  expenditures 
that  confer  a  common  benefit,  or  one  that  is  so  treated ;  then  to 
collect  special  compulsory  revenues  for  a  part  of  the  cost  from 
those  persons  regarded  as  specially  benefited  by  expenditures 
of  class  three ;  while  the  revenues  for  meeting  the  fourth  class  of 
expenditures  are  raised  by  the  sale  of  the  commodities  or  services. 

Professor  Seligman  finds  that  there  are  three  distinct  classes 
of  revenues,  each  resting  on  a  different  justification.-  The  first 
of  these  three  we  shall  call  taxes.  This  is  a  slightly  narrowed 
use  of  the  term.  In  the  broadest  sense  an  exercise  of  the  taxing 
power  of  the  State  occurs  whenever  a  compulsory  contribution 
of  wealth  is  taken  from  a  person,  private  or  corporate,  under 
the  authority  of  the  public  powers.  But  such  a  broad  definition 
of  taxes  would  include,  also,  the  charges  for  expenditures  of  the 
third  class  levied  to  pay  the  cost  or  part  of  the  cost  of  a  special 
service.  As  these  are  certainly  different  from  those  charges 
levied  to  meet  the  expenditures  conferring  a  common  benefit,  it 
is  necessary  to  adopt  the  narrower  definition. 

Taxes  Defined.  —  In  this  sense,  then,  taxes  are  general  com- 
pulsory contributions  of  wealth  levied  upon  persons,  natural  or 
corporate,  to  defray  the  expenses  incurred  in  conferring  a  com- 
mon benefit  upon  the  residents  of  the  State.  A  tax  is  justified, 
but  not  necessarily  measured,  by  the  common  benefit  conferred. 

Fees  Defined.  —  When  a  distinct  attempt  is  made  to  levy 
the  charge  only  where  a  traceable  or  assumed  special  benefit  is 
conferred,  and  to  make  it  cover  the  cost,  or  a  part  of  the  cost 
thereof,  the  compulsory  payment  is  a  fee.  In  the  broadest 
sense  fees  are  taxes,  but  they  are  not  taxes  in  the  narrower  sense 
defined  above.     They  compose  a  large  and  important  class  by 

1  See  Part  I,  Chap.  I,  sec.  6. 

2  See  Selipman,  "Classification  of  Revenues,"  in  the  Qiiarlerly  Journal  of  Eco- 
nomics, April,  i8g,3,  and  April,  1895;  Essays,  Chap.  IX.  In  my  opinion  Professor 
Seligman  has  not  improved  his  classification  Ijy  the  refinements  introduced  in  the 
second  article.  Nor  is  the  necessity  for  distinguishing  between  fees  and  special 
assessments  clear.  Special  assessments  are  a  kind  of  fee,  even  within  the  terms  of 
the  professor's  definition  of  fees.  Nothing  is  gained  by  raising  classes  logically 
secondary  in  character  to  first  place.  It  is  hoped  that  the  simple  general  outlines  of 
Professor  .Seligman's  classification,  as  given  in  the  text,  may  find  general  acceptance. 


6o  INTRODUCTION  TO  PUBLIC   FINANCE 

themselves.  A  fee  has  a  different  justification  from  a  tax.  A  fee 
never  exceeds  the  cost  of  the  special  service  rendered.  A  charge 
for  a  special  benefit  that  exceeds  the  cost  is  best  regarded  as 
consisting  of  two  parts :  one  a  fee,  the  other  a  special  tax.  A 
fee  may  be  defined  as  a  compulsory  contribution  of  wealth 
made  by  a  person,  natural  or  corporate,  under  the  authority  of 
the  public  powers  to  defray  a  part  or  all  of  the  expenses  involved 
in  some  action  of  the  government,  which,  while  creating  a 
common  benefit,  also  confers  a  special  benefit,  or  one  that  is 
arbitrarily  so  regarded. 

Rates  Defined.  —  The  third  category  of  revenues  has  been 
called  "contractual"  revenues,  or,  by  the  United  States  Census 
Bureau,  "  commercial  "  revenues.  They  are  more  specifically 
designated  by  Professor  Seligman  as  "  prices."  But  there  are 
good  reasons  for  preferring  the  term  "  rates  "  as  the  general 
designation  of  the  class.  They  are  the  charges  made  when  the 
government  performs  some  service,  or  supplies  some  commodity, 
in  substantially  the  same  manner  as  that  service  would  be  per- 
formed, or  the  commodity  supplied  and  sold,  by  private  enter- 
prise. Thus  we  speak  of  railway  rates,  water  rates,  rates  for 
gas  or  electrical  current,  telegraph  and  telephone  rates,  etc. 
At  the  same  time  we  speak  of  the  "  price  "  of  Gobelin  tapestry, 
or  of  Sevres  ware.  While  common  usage  is  not  altogether 
consistent,  the  charges  made  by  a  monopoly  are  more  often 
called  rates  than  prices.  The  government  generally  estabhshes 
a  monopoly  whenever  it  takes  over  any  industry  and  refuses 
to  allow  its  citizens  to  compete  with  it.  Industries  in  which 
it  allows  competition  are  rather  unusual  and  exceptional. 
Hence  the  term  "  rate  "  seems  preferable  to  "  price,"  and  will 
be  adopted  in  this  work.^ 

If  the  State  has  a  monopoly,  it  may  act  as  a  private  person 
would  and  take  "  all  the  traffic  will  bear,"  or  it  may  forego  a 
part  of  the  possible  gain,  and  the  payment  becomes  or  ap- 

*  The  term  "rate"  was  not  used  in  this  sense  in  the  first  edition  of  this  book,  nor 
has  it  yet  received  general  recognition  in  theoretical  works.  But  it  is  not  infre- 
quently so  used  in  official  documents.  It  should  not  be  confused  with  the  English 
designation  of  local  taxes  which  are,  in  that  country,  generally  spoken  of  as  par  ex- 
cellence, "the  rates." 


THE   CLASSIFICATION  OF  PUBLIC   REVENUES  6l 

preaches  a  fee.  If  the  State  has  no  monopoly,  it  must,  per- 
force, act  as  an  individual  would,  subject  to  competition.  Every 
civilised  country  has  these  three  categories  of  revenues,  and 
combinations  thereof,  and  no  more  than  these.  Every  civilised 
country  recognises  the  same  justification  for  each  contribution. 
Every  government  appeals  to  the  same  motives  to  induce  the 
payment  of  each  class.  In  the  case  of  the  first  two  classes  the 
motive  is  compulsion,  in  the  last  the  government  withdraws 
and  allows  the  interest  of  the  individual  to  bring  him  forward 
and  induce  him  to  make  the  contribution.  This  class  has  been 
called  voluntary.  If  this  term  meant  merely  the  absence  of 
compulsion,  —  the  spontaneity,  as  it  were,  of  the  contribution, 
—  it  would  be  satisfactory.  But  generally  there  is  the  danger 
of  confusion  arising  from  the  implication  in  the  term  that  the 
contribution  is  without  return,  of  the  nature  of  a  gift.  Hence, 
in  order  to  show  the  character  of  the  payment,  Professor  SeHg- 
man  has  called  it  "  contractual."  There  are  serious  objections 
to  this  term  also,  although  it  is  of  such  a  character  as  to  admit 
of  a  technical  application  very  easily.  But  in  lieu  of  a  better 
and  for  sake  of  uniformity  we  will  adopt  it.  There  is  less 
objection  to  the  term  "  commercial  "  revenues,  used  by  the 
United  States  Census  Bureau.  But  up  to  the  present  time 
the  term  has  not  been  commonly  adopted. 

Sec.  6.  Compulsory  Revenues  are  Derivative ;  Contractual 
are  Not.  —  Thus  far,  for  sake  of  simplicity,  and  not  to  depart 
from  the  usage  of  other  writers,  we  have  considered  the  revenues 
as  practically  identical  with  the  money  flowing  into  the  treasury. 
Services  rendered  without  pay  do  not  belong  to  our  subject. 
But  still  it  is  not  quite  accurate  to  identify  the  public  revenues 
with  the  money  that  flows  into  the  treasury.  Money  is  here, 
as  in  private  households,  but  the  representative  of  wealth. 
When  the  government  compels  its  subjects  to  pay  contributions 
of  classes  one  and  two,  taxes  and  fees,  it  does  so  in  order  to  ob- 
tain control  of  wealth  which  it  takes  from  the  people  to  consume 
for  a  public  purpose.  But  in  the  case  of  contractual  revenues 
the  matter  is  quite  different.  Here  the  government  simply 
sells,  for  money,  wealth :  material  things,  privileges,  or  ser- 


62  INTRODUCTION  TO  PUBLIC  FINANCE 

vices  which  it  has  brought  into  existence.  The  transaction  is  a 
simple  sale.  This  is  partly  true  of  some  fees.  The  money  that 
flows  into  the  treasury  simply  takes  the  place  of  actual  wealth 
already  created  or  being  created  by  the  government.  The 
important  thing  to  note  is  that  rates  result  in  little  or  no  increase 
in  the  amount  of  wealth  in  the  hands  of  the  government,  unKke 
the  other  cases,  but  represent  a  mere  change  in  the  form  of  the 
wealth  already  owned.  It  is  not  wealth  taken  from  the  people 
to  be  consumed  by  the  government ;  but  wealth  created  by  the 
government  is  turned  mto  money  so  that  it  may  be  more  con- 
veniently used.  Nothing  is  taken  from  the  people,  for  they 
receive  back  the  equivalent  of  their  money  in  wealth,  over 
which  they  then  have  control  as  owners.  In  the  case  of  com- 
pulsory revenues  the  matter  is  different  because  they  receive 
back  nothing  tangible,  but  simply  enjoy  the  common  or  special 
benefits  of  good  government.  These  benefits  are  of  the  same 
character  exactly  as  the  benefits  which  accrue  to  the  individual 
when  he  consumes  his  own  wealth.  They  are  "  reproductive," 
if  at  all,  in  the  same  sense  that  the  consumption  of  bread  by  the 
worker  is  reproductive.  That  is  no  sense  at  all.  Just  as  the 
aim  of  all  production  in  the  economic  world  is  consumption  or 
the  satisfaction  of  wants,  so  the  end  and  aim  of  the  compulsory 
collection  of  revenues  is  consumption  by  the  State.  Some- 
times, to  be  sure,  the  government  turns  these  funds  into  per- 
manent forms  of  wealth  which  are  slowly  consumed ;  as,  for 
example,  roads.  Sometimes,  too,  the  government  adds  to  the 
effective  power  of  the  wealth  before  consuming  it,  or  uses  it  to 
produce  new  wealth ;  but  yet,  so  far  as  the  individual  is  con- 
cerned, he  has  parted  with  his  property  in  a  way  which  leaves 
him  benefited,  to  be  sure,  but  in  exactly  the  same  position  as 
when  he  spends  the  same  amount  for  some  gratification.  Quite 
the  contrary  is  his  position  when  he  buys  a  piece  of  china  made 
by  the  government,  for  then  he  has  the  equivalent  of  his  money. 
The  government,  too,  is  no  richer  than  before,  but  has  its 
wealth  in  a  form  which  better  suits  it.^  Frequently  the  govern- 
ment uses  the  wealth  created  directly  without  first  turning  it 
1  Cf.  Stein,  Finanzwissenschajl,  II,  138. 


THE   CLASSIFICATION  OF  PUBLIC  REVENUES  63 

into  money.  This  wealth  is  as  much  a  part  of  the  revenues  as 
any  that  is  sold. 

We  may  now  change  our  terminology  slightly,  and  say  that 
there  are  three  sources  of  public  revenues :  the  first  is  collected 
from  all  the  citizens  by  compulsion,  on  the  ground  that  certain 
expenditures  are  necessary  and  confer  a  common  benefit  upon 
all ;  these  are  taxes.  The  second  is  collected  by  compulsion 
from  certain  persons  on  the  ground  that  they  are  specially  bene- 
fited by  some  expenditures ;  these  are  fees.  And  lastly,  the 
State  creates  wealth  for  itself.  The  wealth  thus  created  consti- 
tutes a  part  of  the  revenue  of  the  government  belonging  to  the 
third  class.  This,  whether  sold  or  not,  is  contractual  revenue  or 
commercial  revenue,  and  is  received  in  the  form  of  rates. 

Sec.  7.  Gifts,  Fines,  and  Penalties.  —  One  or  two  minor 
matters  have  to  be  noticed  and  our  classification  is  complete. 
Sometimes  States  receive  gifts,  generally  for  some  special  pur- 
pose. These  are  now  rare  and  unimportant.  The  special 
purpose  is  usually  more  or  less  outside  the  general  functions  of 
the  State.  Sometimes  the  State  receives  property  by  reversion, 
or  takes  property  which  has  no  apparent  owner.  This,  too,  is 
an  insignificant  category.  The  State  may  exercise  the  right  of 
eminent  domain  and  take  property  for  some  purpose.  Gen- 
erally speaking,  it  restores  an  equal  amount  of  some  other  kind 
of  wealth,  so  this  transaction  results  in  no  net  revenue.  The 
State  is  the  recipient  of  not  insignificant  sums  from  fines  and 
penalties  inflicted  under  the  penal  power.  These  are  compul- 
sory contributions  levied  with  an  intent  to  injure,  and  differ 
materially  from  the  other  categories.  Their  nature  is  clear, 
and  they  will  receive  no  further  attention.  All  the  receipts  of 
the  State  come  under  one  or  the  other  of  these  categories. 


CHAPTER  II 

THE  VARIOUS  KINDS  OF  TAXES,  FEES,  AND  RATES;  ALSO 

DEFINITIONS 

Section  i.  The  Measure  of  Taxation.  —  Considerable  con- 
fusion in  the  discussions  of  the  different  modes  of  taxation  is 
due  to  the  failure  to  distinguish  clearly  between  the  justifica- 
tion of  taxation  in  general  {i.e.  why  there  should  be  any  taxes 
at  all)  and  the  measure  of  taxation  {i.e.  what  should  be  the  basis 
upon  which  to  decide  how  much  each  citizen  should  pay). 
The  universally  accepted  justification  of  taxation  is  the  common 
benefit  conferred  upon  the  individuals  by  the  action  of  the 
government.  But  the  common  benefit  is,  strictly  speaking, 
equal,^  while  the  taxed  citizens  are  unequal  in  wealth  and 
ability  to  pay  taxes.  Therefore  recourse  has  to  be  had  to  some 
other  measure  of  taxation.  It  lay  nearest,  in  the  search  for 
such  a  measure,  to  overlook  the  distinction  between  the  measure 
and  the  justification  and  to  assume  that  there  was  a  difi'erence 
in  the  benefit  enjoyed  by  the  different  citizens. 

The  Benefit  Theory.  — ■  Thus  one  theory  assumes  that  pro- 
tection to  Hfe,  liberty,  and  property  is  the  chief  benefit  conferred, 
and  that  this  benefit,  or  at  all  events  its  cost,  varies  as  the 
property  varies,  generally  in  exactly  the  same  proportion. 
This  theory  has  been  called  the  benefit  theory  of  taxation, 

*  "The  protection  of  the  subject  in  the  free  enjoyment  of  his  life,  his  liberty,  and 
his  property,  except  as  they  might  be  declared  by  the  judgement  of  his  peers  or  the 
law  of  the  land  to  be  forfeited,  was  guaranteed  by  the  twenty-ninth  chapter  of 
Magna  Charta,  'which  alone,'  says  Sir  William  Blackstone,  'would  have  merited 
the  title  that  it  bears  of  the  Great  Charter.'  "  Cooley,  Constitutional  Limitations,  5th 
edition,  p.  430.  "Equality  of  rights,  privileges,  and  capacities  unquestionably 
should  be  the  aim  of  the  law;  .  .  ."  "The  State,  it  is  to  be  presumed,  has  no 
favours  to  bestow,  and  designs  to  inflict  no  arbitrary  deprivation  of  rights."  Ibid., 
pp.  486  and  487. 

64 


THE  VARIOUS   KINDS  OF  TAXES,   FEES,   AND   RATES      65 

because  it  attempts  to  estimate  by  the  benefit  conferred  the 
amount  of  tax  each  individual  should  pay. 

The  Faculty  Theory.  —  The  difiiculties  involved  in  measur- 
ing benefit,  with  suflicient  accuracy  to  serve  as  a  basis  for  taxa- 
tion, led  another  school  of  thinkers  to  abandon  that  entirely. 
These  writers  feel  that  each  citizen  is  necessarily  a  part  of  the 
organism  of  the  State,  one  of  the  nourishing  cells,  as  it  were. 
And,  as  in  all  organisms  of  nature  each  organ  or  each  cell  con- 
tributes to  the  fife  of  the  whole,  in  accordance  with  its  powers 
or  strength,  so  each  citizen  should  contribute  as  he  is  able.  They 
claim  that  it  is  easier  to  measure  ability  than  it  is  to  measure 
benefit.  This  theory  is  called  the  faculty  theory,  the  term 
"  faculty  "  having  been  found  in  this  sense  in  early  tax  laws. 
Generally  speaking,  this  ability  is  supposed  to  be  indicated  in 
some  way  by  wealth  or  by  income.  But  the  advocates  of 
faculty  as  a  measure  of  taxation  encounter  a  serious  difficulty  in 
attempting  to  ascertain  whether  faculty  is  proportional  to  wealth 
or  income  or  increases  more  rapidly  as  these  increase  in  amount. 
A  negative  side  of  the  same  idea  is  presented  when  it  is  claimed 
that  the  tax  should  impose  an  equal  sacrifice  upon  every  citizen. 
In  determining  what  constitutes  equal  sacrifice,  we  encounter 
the  same  difficulty  as  in  determining  how  to  measure  ability.^ 

Sec.  2.  Difficulties  of  Classification.  —  It  will  be  noticed 
that  the  basis  from  which  each  of  these  measures  starts  is 
individual  wealth.  The  first  argues  that  benefit  is  indicated 
by  wealth,  the  second  that  faculty  is  so  indicated.  If  wealth 
is  the  basis,  then  the  classification  of  taxes  might  be  made  to 
depend  on  that  of  wealth.  Such  a  method,  although  tried,  has 
been  found  impracticable,  because  the  processes  of  shifting 
render  it  impossible  to  ascertain  the  final  incidence  with  suffi- 
cient accuracy  for  classification.  It  has  also  been  suggested 
that  we  might  use  the  different  specific  means  employed  by  na- 
tions to  measure  benefit  or  faculty.  But  here  again  we  meet 
with  difficulties  that  are  almost  insuperable;  for  in  that  case 

1  See  Chap.  Ill  for  further  discussion  of  this  jKiint.  A  full  and  instructive  dis- 
cussion of  these  theories  is  to  be  found  in  Seligman's  Progressive  Taxation  in  Theory 
and  Practice.  See  also,  Professor  Edgeworth's  three  articles  on  the  "Pure  Theory 
of  Taxation,"  Economic  Journal,  Vol.  VII. 


66  INTRODUCTION  TO  PUBLIC  FINANCE 

the  classification  will  depend  on  the  theory  adopted  as  to  the 
correct  measures.  If  we  adopt  the  benefit  theory,  our  classi- 
fication will  depend  on  the  different  indices  of  benefit  chosen. 
If  we  adopt  the  faculty  theory,  then  our  classification  will  be 
according  to  the  indices  of  faculty.  But  we  are  not  at  liberty 
to  adopt  one  or  the  other  of  these  theories  exclusively,  because 
no  nations  have  done  so  in  practice,  and  their  taxes  are  some 
of  them  based  on  the  one  theory,  or  at  least  best  explained 
thereby,  and  some  on  the  other,  while  many  combine  both  or 
may  be  interpreted  in  either  way.  At  the  same  time  many 
taxes  that  could  not  be  justified  on  either  basis  are  retained  by 
the  nations  on  grounds  of  general  expediency,  because  they 
yield  considerable  revenue,  or  because  they  have  been  long  in 
use.  If,  therefore,  we  adopt  a  classification  presupposing  either 
theory,  we  shall  find  many  taxes  that  do  not  conform  to  it. 
Inasmuch  as  no  consistent  plan  for  the  measurement  of  taxation 
has  been  adopted  by  any  country,  no  uniform  method  of  classi- 
fication upon  "  natural  "  grounds  can  be  found. 

These  difficulties  are  inherent  in  the  matter  that  we  are 
attempting  to  classify.  The  librarian  generally  desires  to 
arrange  his  books  according  to  the  subjects  treated.  But 
encyclopaedias  could  not  be  so  arranged  without  tearing  the 
books  to  pieces.  We  might  theoretically  dissect  each  tax,  and 
assign  its  parts  to  the  different  categories  according  to  the  real 
nature  of  each  part.  But  we  gain  little  by  this  painful  process. 
In  this  case  classification  will  not  help  us  to  ascertain  the  real 
nature  of  the  things  studied. 

These  difficulties  have  not  always  been  regarded  as  insu- 
perable, and  many  brave  attempts  have  been  made  to  overcome 
them,  but  with  so  little  uniformity  as  to  mark  the  failure. 
There  are  almost  as  many  classifications  as  writers.^  The  least 
satisfactory  of  all  are  those  that  attempt  to  find  some  natural 
arrangement.  Those  which  have  the  most  apparent  success 
accept  the  official  names  used  by  the  treasury  departments  of 
the  different  nations,  and  give  them  merely  such  limitation  as 
is  necessary  to  use  them  scientifically. 

•  See  Nicholson,  Principles  of  Political  Economy,  Vol.  Ill,  p.  291  £F. 


THE   VARIOUS   KINDS  OF  TAXES,   FEES,  AND   RATES      67 

Sec.  3.  Direct  and  Indirect  Taxes.  —  Perhaps  the  most 
common  distinction  is  that  made  between  direct  and  indirect 
taxes.  This  distinction  first  obtained  theoretical  importance 
in  the  writings  of  the  Physiocrats.  By  direct  taxes  they  meant 
any  of  those  taxes  which  were  levied  immediately  upon  the 
"  produit  net."  ^  There  alone,  they  argued,  could  be  the  fund 
out  of  which  taxes  could  be  paid.  To  levy  taxes  anywhere  else 
was  indirect,  because  the  burden  would  be  shifted  from  one  to 
another  until  it  rested  there.  The  assignment  of  any  particu- 
lar tax  to  one  or  the  other  of  these  categories  was  with  them  a 
mark  of  approval  or  condemnation.  With  the  recognition  that 
other  economic  processes  besides  those  which  added  to  the 
material  property  of  the  world  created  wealth,  this  peculiar 
theory  of  taxation  drifted  into  abeyance.  The  same  terms, 
however,  have  been  widely  used  by  officials  and  writers  and 
have  such  prevalence  that  a  recognition  of  them  cannot  be 
avoided. 

Rau  and  Wagner  have  made  the  most  elaborate  attempts  to 
define  the  modern  usage."  In  this  they  were  only  partly  suc- 
cessful, because  of  irregularities  in  official  usage.  But  despite 
these  irregularities  the  terms  are  valuable.  Wagner's  distinc- 
tion is  practically  as  follows.  There  are  two  ways  in  which 
direct  and  indirect  taxes  differ,  (i)  In  the  case  of  direct  taxes, 
the  taxpayer  is  also  the  tax-bearer,  at  least  in  the  expectation 
of  the  lawgiver ;  any  shifting  of  the  burden  to  another  is  not 
expected,  not  desired,  and  sometimes,  even,  forbidden,  or  sub- 
ject to  penalty.  Indirect  taxes  are,  vice  versa,  those  in  which 
the  taxpayer  is  not  permanently  the  tax-bearer,  or  is  not  in- 
tended to  be ;  but  a  shifting  of  the  burden  to  another  is  expected 
and  desired,  and  may  even  be  prescribed.^ 

But  the  element  of  shifting  is  not  the  only  one  that  is  essential 
to  the  idea.  The  second  characteristic  is  what  may  be  called 
the  technical,  administrative  conception  of  direct  and  indirect 
taxes.     It  is  based  on   the  method  of  procedure.    (2)  Direct 

'  Cf.  Higgs,  The  Physiocrats. 

■  Cf.  Bullock,  "  Dir((  t  and  Indirect  Taxes,"  Political  Science  Quarterly,  Vol.  XIII. 
'Wagner,  Finanzwissenschafl,  II,  1st  ed.,  p.  269;   2d  cd.,  sees.  97-100.     Schon- 
berg's  Handbuch,  3d  ed..  Ill,  p.  171. 


68  INTRODUCTION  TO  PUBLIC   FINANCE 

taxes  are  such  as  are  laid  regularly  according  to  some  fixed 
fact  (or  one  so  treated,  and  at  least  somewhat  fixed),  some- 
thing regularly  recurrent,  and  hence  previously  ascertainable, 

—  a  fact  as  of  personality,  of  rank,  of  property,  of  earning,  etc., 

—  and  are,  consequently,  assessed  according  to  some  list  or  roll 
(cadastre).  Indirect  taxes,  on  the  other  hand,  are  such  as  are 
laid  according  to  some  changing,  temporary,  more  or  less  acci- 
dental fact  which  is,  consequently,  not  previously  ascertain- 
able, —  something  the  result  of  processes,  events,  transactions, 

—  and  are  laid  and  collected  according  to  tariffs.^ 

These  two  methods  of  distinction  follow  quite  closely  the 
usages  of  theoretical  writers  and  of  ofiicial  bureaux.  There 
are  important  exceptions  in  some  countries.  Thus  in  France 
the  customs  duties  are  not  officially  classed  as  indirect  taxes, 
but  form  a  class  by  themselves  akin  to  direct  taxes.  In  the 
United  States  at  the  time  of  the  Civil  War  the  income  tax  was 
viewed  by  the  courts  as  an  indirect  tax,  or  at  least  not  as  a 
direct  tax  in  the  sense  of  the  Constitution.^  This  decision, 
however,  was  reversed  in  1895,  by  a  bare  majority  of  the  same 
court,  which  decided  that  a  somewhat  similar  income  tax  was  a 
direct  tax  in  the  meaning  of  the  Constitution.  This  decision 
was  in  accord  with  the  distinction  made  above. 

The  principal  direct  taxes  are :  the  land  taxes,  building  taxes, 
property  taxes,  poll  taxes,  class  taxes,  income  taxes,  industry 
taxes ;  the  indirect  taxes  are :  the  custom  duties  (with  the  ex- 
ception of  the  French),  internal  excise  taxes,  transaction  taxes, 
most  fees  and  licenses.  The  inheritance  taxes,  or  death  duties, 
as  they  are  called  in  England,  are  not  easy  to  classify.  In  the 
first  sense  they  are  direct  taxes,  and  in  the  second  they  are  in- 
direct. This  is,  perhaps,  the  only  important  tax  that  cannot 
be  easily  classified.  The  inheritance  tax  wherever  it  exists  is 
used  because  it  is  expedient  and  without  much  cost  yields  a 
large  return.     It  is  levied  at  a  time  when  the  persons  paying  it 

1  Wagner,  Finansmssenschaft,  II,  2d  ed.,  p.  239. 

2  Springer  v.  United  States,  102  U.  S.  508.  See  article,  "The  Direct  Tax  of  1861," 
Quarterly  Journal  of  Economics,  July,  1889;  Seligman,  "The  Income  Tax,"  Forum, 
189s  ;  Bullock,  "The  Origin  and  Effect  of  the  Direct  Tax  Clause,"  Political  Science 
Quarterly,  XV,  p.  470  S. 


THE   VARIOUS   KINDS   OF  TAXES,    FEES,   AND   RATES      69 

are  not  in  position  to  demand  a  strong  justification.  It  is 
sometimes  justified  on  the  ground  that  it  compensates  for  pre- 
viously unpaid  taxes.  If  this  justification  holds,  then  the  in- 
heritance tax  must  be  classed  as  a  direct  tax. 

Sec.  4.  Taxes  on  Persons,  Property,  or  Income.  —  A  few 
other  terms  which  are  often  used  as  the  names  of  different 
groups  of  taxes  and  help,  in  a  way,  to  classify  them  must  be 
mentioned  in  this  connection.  We  sometimes  speak  of  taxes 
as  being  separable  into  (i)  those  on  persons,  (2)  those  on  prop- 
erty, (3)  those  on  income.  These  terms  do  not  indicate  the 
final  source  from  which  the  tax  is  paid,  but  the  basis  upon  which 
it  is  levied. 

1.  In  the  case  of  personal  taxes  the  different  persons  who 
are  to  pay  the  tax  are  listed  and  assessed  either  (i)  individually, 
as  in  the  case  of  per  capita  taxes,  or  (2)  as  representatives  of  a 
group,  as  in  the  family  or  hearth  taxes,  or  (3)  according  to  some 
characteristic,  as  rank  in  hfe,  office,  employment,  age,  income, 
property,  etc.,  supposed  to  be  indicative  of  the  benefit  they 
receive  from  the  government  or  their  ability  to  pay.  A  com- 
plete system  of  such  taxes  might  be  built  up,  and  it  is  possible 
to  suppose  that  all  the  requirements  of  justice  could  be  met 
thereby. 

2.  Taxes  on  property  are  those  taxes  which  take  the  property 
owned  by  a  person  as  the  index  either  of  the  benefit  received  or 
of  the  ability  to  pay.  These  taxes  may  be  considered  as  pur- 
suing property  wherever  it  is  to  be  found  with  little  or  no  re- 
gard for  the  personality  of  the  owner.  They  are  not,  of  course, 
in  any  but  the  most  exceptional  instances,  paid  out  of  property. 
But  no  particular  regard  is  had  to  the  real  source  of  payment. 
They  may  be  levied  upon  any  and  every  kind  of  property. 
They  are  sometimes  called  real  taxes  from  res,  things.  But  this 
usage  has  no  established  sanction  in  English ;  in  that  language 
real  taxes  are  taxes  upon  real  estate. 

3.  Taxes  on  income  in  the  broadest  sense  are  all  those  taxes 
which  make  wealth  in  the  process  of  acquisition  the  basis  of 
assessment.  These  are  of  two  principal  kinds  :  (i)  those  which 
are  levied  upon  the  annual  increment  of  wealth  as  such,  irre- 


70  INTRODUCTION   TO   PUBLIC   FINANCE 

spective  of  the  person  who  is  the  recipient  thereof.  That  is, 
they  treat  the  various  items  of  wealth  increment  as  the  basis 
of  taxation  without  regard  to  the  grouping  of  these  increments 
into  a  whole  in  the  income  of  any  particular  person,  and  con- 
sider the  person  paying  the  tax  only  in  so  far  as  he  is  an  income 
producer  through  his  own  activities.  This  is  the  character  of 
the  British  income  tax.  (2)  Those  which  demand  of  each 
person,  or  seek  to  obtain  concerning  each  person,  a  summary 
of  the  total  income  he  receives.  This  latter  tax  is  sometimes 
so  treated  as  to  make  it  difficult  to  distinguish  it  from  a  personal 
tax,  for  the  different  persons  are  listed  and  classed  according 
to  amount  of  income  they  receive. 

By  a  peculiar  and  entirely  unwarranted  use  of  common 
English  terms  in  a  strange  and  foreign  sense,  property,  income, 
and  the  like  have  been  called  the  tax  objects,  and  the  corre- 
sponding taxes  objective  taxes,  meaning  that  they  are  taxes  on 
things  in  distinction  from  taxes  on  persons.  On  the  other 
hand,  the  persons  are  called  the  tax  subjects,  and  personal 
taxes  called  subjective.  This  usage,  although  it  has  the  sanc- 
tion of  a  great  authority,  in  Bastable,  has  fortunately  not  been 
favourably  received.  Seligman,  in  a  re\dew  of  Bastable's  book, 
pointed  out  that  by  the  object  of  a  tax  we  usually  mean  the 
purpose  of  the  tax,  and  the  tax  subjects  may  be  things  as  well 
as  persons  subjected  to  the  tax.i 

Sec.  5.  Taxes  on  Rent,  Interest,  Profits,  and  Wages,  etc.  — 
Following  the  lead  of  Adam  Smith,  various  attempts  have  been 
made  to  classify  taxes  according  as  they  fall  upon  one  or  the 
other  of  the  different  shares  in  distribution,  — ■  rent,  interest, 
profits,  and  wages.  But,  as  Bastable  has  well  shown,  the 
sources  from  which  the  different  taxes  are  paid  are  generally  a 
combination  of  several  of  these.  The  wealth  or  income  of  very 
few  persons  consists  of  simply  one  of  these  shares.  The  at- 
tempts to  carry  out  such  classifications  consistently  have  failed. 
Bastable's  attempted  compromise  by  calling  such  taxes  as  can 
be  traced  directly  to  one  or  the  other  shares  in  distribution 
primary,  and  all  others  secondary,  brings  us  to  practically  the 

1  Political  Science  Quarterly,  VII,  p.  717. 


THE   VARIOUS   KINDS   OF   TAXES,   FEES,   AND   RATES      7 1 

same  results  that  were  gained  by  Wagner  in  the  discussion  of 
direct  and  indirect  taxes.  His  primary  taxes  are  those  called 
direct  taxes  above,  his  secondary  are  the  indirect. 

One  other  important  set  of  distinctions  must  receive  our  at- 
tention, because  it  has  the  sanction  of  two  prominent  authori- 
ties. Wagner  suggested  and  Cohn  accepted  the  classification 
into  taxes  paid  out  of  wealth  at  the  time  of  its  acquisition 
{Erwerb),  or  while  in  possession  (Besitz),  or  upon  its  consump- 
tion (Verbrauch).  This  distinction,  according  to  the  stage  in 
which  the  tax  finds  the  wealth  from  which  it  is  paid,  is  often 
useful  in  showing  the  effects  of  certain  taxes. 

Another  very  valuable  distinction  is  that  made  by  the  term 
"  taxes  on  revenue."  Taxes  on  revenue  are  those  that  fall  or 
are  assessed  on  the  revenue  or  income  yielded  by  different 
kinds  of  property.     These  are  a  species  of  taxes  on  acquisition. 

The  three  sets  of  terms  which  we  have  used  in  this  work  are : 
(i)  direct  and  indirect  taxes ;  (2)  personal,  property,  and  income 
taxes ;  (3)  taxes  paid  on  wealth  at  acquisition,  in  possession, 
and  at  the  time  of  consumption. 

Sec.  6.  Classification  of  Fees.  —  We  now  come  to  the  im- 
portant task  of  classifying  fees.  The  essential  consideration 
to  be  held  in  mind  about  these  payments  is  that  they  cover  a 
part  of  the  total  cost  of  certain  governmental  activities,  which 
are  performed  for  the  benefit  of  all,  but  yet  confer  a  real  or  as- 
sumed special  benefit  on  the  individual.  When  the  payment 
covers  the  whole  or  a  little  more  than  the  whole  cost,  it  is  a  rate. 
Since  fees  are  levied  upon  the  receivers  of  certain  benefits  from 
the  government,  it  follows  that  the  only  classification  for  fees 
is  that  which  shows  what  activities  of  the  government  convey 
the  benefit.  We  can  thus  classify  according  to  the  different 
departments  of  the  government,  for  the  services  of  which  fees 
are  collected. 

I.  Judicial  and  Legal  Fees. — The  most  numerous  are  the 
judicial  and  legal  fees,  the  character  of  which  has  already  been 
made  clear  from  the  discussion  of  the  nature  of  these  expendi- 
tures.'    Examples  of  these  are  the  regular  court  costs  and  fees, 

1  See  Part  I,  Chap.  Ill,  sec.  4. 


72  INTRODUCTION  TO   PUBLIC   FINANCE 

probate  fees,  the  charges  for  recording  deeds,  mortgages,  con- 
tracts, marriages,  etc. 

2.  Administrative  Fees.  —  Next  come  the  administrative 
fees  for  the  special  services  of  that  department.  They  are : 
police  fees,  charged  for  the  special  benefits  accruing  or  supposed 
to  accrue  to  the  individuals  from  the  exercise  of  the  poHce  power 
of  the  State  ;  the  fees  for  education,  when  charged ;  a  large  num- 
ber of  industrial  and  commercial  fees  for  services  rendered 
individuals  in  their  industrial  and  commercial  undertakings. 
The  industrial  fees  include  license  charges  for  permission  to 
carry  on  certain  businesses  (care  must  be  taken  not  to  confuse 
these  with  police  fees,  nor  with  business  taxes  assessed  on  the 
same  plan).  Commercial  fees  include  road  and  canal  tolls, 
harbour  dues,  and  a  number  of  similar  charges. 

Special  Assessments.  —  A  very  important  class  of  adminis- 
trative fees  are  those  known  as  special  assessments,  or  in  Eng- 
land as  "  betterment  "  taxes,  usually  levied  for  local  improve- 
ments affecting  property,  as  streets,  sewers,  etc.  Sehgman  has 
defined  these  as  follows :  "  A  special  assessment  is  a  compul- 
sory contribution  paid  once  and  for  all  to  defray  the  cost  of  a 
specific  improvement  to  property  undertaken  in  the  pubHc 
interest,  and  levied  by  the  government  in  proportion  to  the 
special  benefits  accruing  to  the  property  owner."  He  regards 
them  as  of  so  much  importance  as  to  make  them  a  class  of  rev- 
enues coordinate  with  taxes  and  fees.  Strictly  speaking,  they 
are  fees. 

Sec.  7.  The  Nature  of  Public  Rates.  —  The  revenues  de- 
rived from  the  rates  charged  for  the  services  rendered  by  the 
industrial  activities  of  the  State,  or  from  the  production  and 
sale  of  commodities,  so  long  as  these  enterprises  are  conducted 
for  profit,  are  of  the  same  general  character  as  the  earnings  of 
the  people.  Early  writers  on  public  finance  devote  a  great 
deal  of  attention  to  the  income  of  the  State  from  the  public 
domain,  forests,  and  mines,  which  were  at  one  time  of  great 
relative  importance.  These  have  shrunk  in  importance,  in 
modern  times,  but  in  their  place  have  come  the  earnings  of  the 
so-called  "  public  service  "  enterprises,  like  the  railroads  and 


THE   VARIOUS   KINDS   OF  TAXES,   FEES,   AND   RATES      73 

the  street  railways,  telegraph  and  telephone  service,  water 
works,  and  others  of  a  similar  character.  As  stated  in  another 
connection,  these  enterprises  are  usually  monopolies.  Even 
when  they  are  not  of  such  a  character  that  they  would  be 
monopohes  even  under  private  control,  the  government  makes 
them  monopolies  by  refusing  to  allow  any  private  enterprise  to 
compete.  The  French  tobacco  monopoly  affords  in  part  an 
example  of  this.  Industrial  enterprises  conducted  by  a  gov- 
ernment for  profit,  under  competitive  conditions,  are  rare. 
The  general  analysis  of  these  earnings,  whether  monopolistic 
or  competitive,  can  be  found  in  any  good  treatise  on  Economics 
and  need  not  be  repeated  here. 

Public  rates,  however,  differ  in  some  respects  from  the  charges 
made  by  similar  private  enterprises.  The  differences  can  be 
most  readily  shown  by  an  illustration.  Let  us  suppose  that  a 
certain  city  is  supplied  with  water  by  two  private  companies, 
both  of  which  have  the  right  to  lay  pipes  wherever  they  wish. 
They  will  then  supply  water,  supposing  that  they  actually  com- 
pete, at  rates  determined  mainly  by  the  costs,  which  are  those 
of  management,  interest  on  the  "  plant,"  the  cost  of  water,  and 
of  the  supplies  and  the  general  running  expenses.  The  average 
rates  will  be  considerably  higher  than  need  be  by  virtue  of  the 
dupHcation  of  the  plant,  etc.  Suppose,  however,  before  any 
material  duplication  is  reached  the  companies  unite,  forming 
one  company  which  has  the  monopoly.  The  charges  will  now 
be  regulated  by  "  what  the  traffic  will  bear,"  and  provided  the 
supply  is  ample  will  tend  to  conform  to  those  rates  which  will 
yield  the  largest  net  returns.  The  principles  by  which  mo- 
nopoly rates  are  regulated  are  well  known  to  students  of  eco- 
nomics. The  charges  in  this  case  cannot  be  greater  than  the 
cost  to  the  citizens  of  operating  their  own  wells,  nor  even  so 
high  as  to  induce  the  citizens  to  economise  materially  in  their 
use  of  water.  But  suppose  that  the  townspeople  are  not  con- 
tent with  the  rates  or  with  the  service.  They  attempt  regula- 
tion and  fail.  They  may  determine  to  buy  out  the  plant. 
Once  the  city  owns  the  plant  it  may  run  it  in  one  of  four  ways, 
(i)  It  may  run  it  as  the  company  did,  to  make  the  highest 


74  INTRODUCTION  TO  PUBLIC  FINANCE 

possible  profits,  charging  all  or  nearly  all  the  traffic  will  bear. 
The  surplus  over  costs  goes  into  the  treasury  and  helps  to  de- 
fray the  other  expenses  of  government.  The  rules  determining 
what  the  traffic  will  bear  are  rules  of  pure  economics.  There  is 
absolutely  no  difference  between  this  public  business  and  a 
private  business.  The  method  of  "  charging  what  the  traffic 
will  bear  "  is  the  method  in  economic  life  of  determining  the 
value  of  commodities  so  sold.  It  takes  the  place  in  the  sale  of 
monopoly  goods  of  the  "  free  dickerings  of  the  market  "  by 
which  price  of  other  goods  is  determined. ^  The  private  company 
had  to  pay  expenses,  so  does  the  city;  the  private  company 
enjoyed  a  surplus  or  made  an  "  unearned  increment,"  so  does 
the  city ;  the  private  company  spent  this  surplus  to  the  satis- 
faction of  the  wants  of  its  stockholders ;  the  city  spends  the 
surplus  for  the  benefit  or  for  the  satisfaction  of  the  general  wants 
of  the  citizens,  who  may  be  regarded  as  its  stockholders.  Even 
if  it  foregoes  taking  quite  all  the  surplus,  the  principle  is  the 
same.  A  private  company  sometimes  does  that  in  deference 
to  public  opinion.  (2)  The  city  may  decide  not  to  make  money, 
but  to  charge  only  what  the  service  costs  and  make  the  service 
as  good  as  possible.  It  then  foregoes  taking  the  full  price  of 
the  wealth  that  it  has  produced  and  allows  each  consumer  to 
enjoy  the  surplus.     Then  the  payment  by  the  citizen  is  a  fee. 

(3)  It  may  charge  a  fee  much  smaller  than  the  cost,  or  a  fee 
for  all  water  consumed  over  a  certain  amount,  but  provide  a 
certain  amount  of  water  for  each  citizen  at  the  common  cost. 

(4)  It  may  distribute  the  water  free  of  charge  and  pay  for  it 
out  of  the  common  fund  derived  from  taxation.  Now  the  sums 
received  in  the  last  three  cases  only  are  fiscal  in  character. 

In  this  connection  it  is  important  to  note  that  there  is  a 
strong  tendency  for  a  government  to  abandon  the  economic,  or 
profit  making,  method  of  managing  such  enterprises  and  to  pass 
to  some  one  of  the  fiscal  methods.  That  is,  the  government's 
method  of  conducting  a  public  service  does  not  usually  con- 

1  See  Sidgwick,  Bk.  II,  Chap.  X;  Andrews,  rnstilntes  of  Economics,  p.  122; 
Marshall,  Ec.  of  Ind.,  pp.  180  ff. ;  Senior,  pp.  103-114;  Sumner,  Essays,  p.  46; 
Hadley,  R.  R.  Trans.,  p.  100;  Seligman,  Railway  Tariffs,  etc.,  pp.  8  ff. 


THE  VARIOUS   KINDS   OF   TAXES,   FEES,   AND   RATES      75 

tinue  to  follow  that  of  private  management.  Thus,  for  example, 
it  would  be  natural,  and  perhaps  proper,  for  a  private  water 
company  to  keep  a  "  large  capital  account  "  and  to  carry  a 
heavy  interest  or  dividend  charge  against  the  earnings.  But 
when  a  government  has  paid  off  in  whole  or  in  part  the  debt 
contracted  when  it  acquired  the  plant,  it  is  not  uncommon  to 
drop  the  interest  charge  and  to  reduce  the  rates  in  proportion 
to  the  reduced  costs.  The  reason  for  making  such  an  enterprise 
a  government  function  is  the  recognition  of  some  public  interest 
or  benefit,  and,  for  the  same  reason,  the  fiscal  method  of  admin- 
istration is  the  more  appropriate.  Some  writers  have  even 
gone  so  far  as  to  suggest  this  as  a  sort  of  test  as  to  whether  any 
given  enterprise  should  be  taken  over  as  a  government  function. 
They  say,  in  substance,  that  if  the  people  are  not  willing  to  see 
the  enterprise  in  question  conducted  on  fiscal  principles,  they 
should  not  make  it  a  government  function,  for  it  will  probably 
pass  on  into  one  of  the  three  fiscal  methods  of  management 
above  outlined  and  may  in  time  reach  the  last. 

As  Cohn  has  so  well  pointed  out,  it  is  a  very  different  problem 
that  we  have  to  deal  with  when  the  management  of  some 
industry  is  made  merely  the  form  or  means  for  collecting  a  tax 
from  certain  classes  of  persons.  The  French  tobacco  monopoly, 
for  example,  is  not  in  any  sense  to  be  looked  upon  as  an  industry 
undertaken  in  the  common  interest,  or  even  in  the  interest  of  a 
particular  class.  It  is  the  aim  of  the  French  government  to 
tax  the  users  of  tobacco.  This  aim  is  attained  by  other  gov- 
ernments through  different  processes.  The  form  of  a  monopoly 
has  been  found  to  be  remarkably  easy,  expedient,  and  successful 
as  a  method  of  indirect  taxation. 

Sec.  8.  Definitions:  The  "Base."  — This  section  will  be 
devoted  to  the  definition  of  terms  used  in  connection  with 
revenues.  The  base  of  a  tax  is  the  thing,  characteristic,  or 
phenomenon  by  the  possession  of  which  the  amount  that  each 
taxpayer  shall  contribute  is  to  be  measured,  or  it  is  that  upon 
which  the  tax  is  "  levied."  The  base  is  not  always,  although 
it  may  be,  the  source  from  which  the  tax  is  paid.  Thus  a  tax 
based  on  property  is  generally  paid  out  of  the  income,  or  rev- 


76  INTRODUCTION  TO  PUBLIC   FINANCE 

enue,  which  flows,  sometimes  from  the  property,  sometimes 
from  other  sources,  while  a  tax  on  income  would  be,  normally, 
paid  from  the  same  income  that  constitutes  the  base.  The 
direct  taxes  are  almost  always  called  by  the  name  of  the  base ; 
indirect  taxes  are  seldom  so  named.  The  base  is  often  expressed 
in  units  of  value ;  as,  for  example,  $ioo  worth  of  property.  It 
may,  however,  be  expressed  in  terms  of  some  other  units  of 
measurement,  as  yards,  tons,  acres,  barrels ;  or  again  by  mere 
count,  as,  one  poll,  one  ox,  etc. 

"  Ad  Valorem  "  and  "  Specific  "  Taxes.  —  When  the  base  is 
expressed  in  terms  of  value,  the  tax  is  sometimes  called  an 
"  ad  valorem  "  tax.  When  the  base  is  expressed  in  terms  of 
some  unit  of  measurement  other  than  value,  the  tax  is  some- 
times called  "  specific."  But  neither  of  these  terms  is  applied 
to  certain  kinds  of  taxes,  such  as  poll  taxes,  income  taxes,  or 
inheritance  taxes.  Sometimes  the  unit  of  the  base  is  complex 
and  arbitrary.  For  example,  in  Vermont,  the  base  of  the 
general  property  tax  is  each  dollar  in  the  "  Grand  List."  But 
only  one  per  cent  of  the  true  value  of  the  property  of  each 
taxpayer  is  "  set  in  the  Hst,"  while  his  poll  is  also  "  set  in  the 
list,"  at  an  arbitrary  valuation  of  $ioo.  This  complexity  of 
the  base  arose,  originally,  from  the  custom  of  fixing  an  arbi- 
trary uniform  value  for  each  piece  of  property,  as  so  much  per 
acre  of  land,  so  much  per  head  of  cattle,  so  much  per  horse, 
irrespective  of  actual  value.  Other  cases  of  such  complex 
bases  usually  have  some  similar  historical  origin. 

The  "  Rate."  —  The  rate  is  the  amount  of  tax  that  falls  upon 
each  unit  of  the  base.  The  rate,  whether  for  specific  or  ad 
valorem  taxes,  may  be  proportional  or  disproportional.  It  is 
proportional  when  it  is  always  in  the  same  proportion  to  the 
base,  whether  the  amount  held  by  a  taxpayer  or  subject  to  the 
tax  be  large  or  small. 

The  important  thing  to  observe  in  connection  with  propor- 
tional tax  rates  is  the  way  in  which  the  rate  is  arrived  at.  It 
often  occurs  that  a  government  desires  to  raise  a  definite  amount 
of  money  by  a  given  tax,  but  the  aggregate  of  the  base  is  not 
known  at  the  time  this  amount  is  fixed.     It  may,  therefore, 


THE  VARIOUS   KINDS  OF  TAXES,   FEES,   AND   RATES      77 

direct  that  when  the  aggregate  of  the  base  is  ascertained,  the 
amount  to  be  raised  shall  be  divided  by  the  aggregate  of  the 
base  and  the  quotient,  or  the  rate  thus  obtained  shall  be  applied 
in  turn  to  the  amount  of  the  base  held  by  each  taxpayer,  thus 
determining  his  taxes.  Or  again,  and  this  is  perhaps  more 
important,  a  central  government  may  apportion  among  its 
local  divisions  the  total  amount  to  be  raised,  assigning  a  lump 
sum  to  each,  and  the  local  government  of  each  division  may 
apportion  its  share  among  its  taxpayers  in  the  manner  above 
described.  In  the  latter  case  the  "  rate,"  so  far  as  individual 
taxpayers  are  concerned,  will  vary  from  one  local  division  to 
another.  When  either  method  is  followed,  the  rate,  or  even  the 
tax  itself,  is  often  called  "  apportioned."  This  distinction  is 
especially  important  in  the  United  States,  where  most  of  the 
state  taxes  are  apportioned  in  this  manner.  In  many  instances, 
however,  the  government  fixes  the  rate  in  advance,  and  is  con- 
tent to  accept  the  revenues,  be  they  large  or  small,  which  the 
rate  so  fixed  will  yield.  It  is  true,  however,  that  even  in  these 
cases  there  is  a  rough  sort  of  apportionment  made  before  the 
rate  is  fixed,  otherwise  the  revenue  might  be  too  large  or  too 
small.  Fixed  proportionate  rates  are  sometimes  laid  down  by 
some  superior  authority  to  hmit  the  extravagance  of  lower 
governmental  bodies. 

Disproportionate  rates  are  rates  which  in  themselves  vary  as 
the  amount  of  the  base  held  by  different  taxpayers  varies. 
These  rates  may  be  progressive  or  regressive. 

Progressive  rates  are  the  most  important  general  class  of 
disproportionate  rates.  This  term  is  applied  when  the  rate  is 
proportionately  higher  for  a  taxpayer  who  is  taxable  for  a  large 
amount  of  the  base  than  for  one  who  is  taxable  for  a  smaller 
amount.  That  is,  the  fraction  taken  is  ever  larger,  the  larger 
the  amount  of  the  base  possessed  by  the  individual  taxpayer. 

Progressive  rates  may  be  regular  or  irregular  according  as 
they  increase  by  some  fixed  mathematical  rule  or  increase  in 
some  more  or  less  arbitrary  manner.  There  are  very  few  regu- 
lar progressive  tax  rates  in  actual  practice.  Arithmetical  or 
geometrical  progression  would  give  regular  progression  and  so 


78 


INTRODUCTION  TO  PUBLIC   FINANCE 


would  many  other  mathematical  formulas,  notably,  some  of 
those  of  calculus.  Of  course,  many  forms  of  regular  progres- 
sion would,  if  continued  long  enough,  reach  a  rate  equal  to  one 
hundred  per  cent  of  the  base.  As  this  results  in  practical  con- 
fiscation, such  an  extreme  is  seldom  provided  by  law.  Usu- 
ally, after  a  certain  relatively  Wgh  point  is  reached,  the  pro- 
gression is  more  or  less  arbitrarily  stopped  and  a  proportional 
rate  is  substituted.  Were  the  progression  to  be  continued 
until  it  resulted  in  confiscation  the  motive  would  not  be  a 
fiscal  one,  for  such  a  policy  would  diminish  the  revenue  by 
ultimately  cutting  down  the  aggregate  of  the  base.  In  fact, 
as  we  shall  see  later,  the  motive  for  a  progressive  rate  is  always 
something  other  than  the  purely  fiscal  one. 

One  of  the  most  common,  and  certainly  one  of  the  most 
important,  forms  of  progression  is  that  called  "  degressive." 
In  this  case  the  rate  (as  distinct  from  the  tax)  increases  but  by 
an  ever  decreasing  increment.  In  perfectly  regular  degression 
the  rate  would  be  so  arranged  that  it  would  constantly  approach 
but  never  quite  reach  a  given  proportional  rate  as  a  limit.  It 
would  be  cumbersome  to  accomplish  this  result  by  varying  the 
nominal  rate.  But  practically  the  same  end  can  be  reached  by 
the  simple  expedient  of  deducting  from  each  of  the  ascending 
amounts  of  the  base  a  fixed  amount,  that  is,  technically  untaxed, 
and  appljdng  to  the  remainder,  in  each  case,  a  nominally  pro- 
portioned rate. 

Diagram  A  illustrates  a  theoretical  form  of  regular  degressive 
taxation,  which  may  be  regarded  as  an  ideal.     The  diagram  is 

DIAGRAM   A 

A  Typical  Form  of  Regular  Degression 


r 

, 



. 

P3 

Pi 
0 

^ 

/ 

( 

C    rrix      ?"2      ^'^S      "'4      ''^5      ^6      ^^7       ^8      '^^9      ^10    ^' U     ^'^12    ^^^3    ^^li 

2/  =  r-^ 


THE   VARIOUS   KINDS   OF  TAXES,    FEES,   AND   RATES      79 

drawn  on  the  assumption  that  a  constant  amount  "  C  "  is 
deducted  from  each  and  every  amount  of  the  base,  be  the  base 
large  or  small,  and  that  the  remainder  is  subject  to  a  propor- 
tional tax  of  "  R,"  which  thus  becomes  the  limit,  which  the 
rate  constantly  approaches  but  never  reaches. 

In  actual  practice  such  regularity  as  is  assumed  in  the  chart 
is  seldom  found.  The  regularity  may  be  broken  by  changing 
the  amount  of  the  deduction  allowed  at  different  stages,  or  by 
cutting  it  off  altogether. 

Diagram  B  represents  the  beginning  of  the  schedule  of  rates 
of  the  British  income  tax,  as  it  was  under  the  law  of  1898,  when 

DIAGRAM   B 

British  Income  Tax,  Form  of  1898.     Rate,  8d.  per  £.     Slightly 
Irregular  Degression,  Ending  in  Proportion 


0 

c 

4 

_J 

,^ 

/ 

1) 

/ 

£  100  200  300  400  500  GOO  700  bOO  900  1000  1100  1200  loOO  1400 


the  rate  was  fixed  at  eight  pence  per  pound.  The  deductions 
allowed  were  £i6o  up  to  an  income  of  £400 ;  then  £150  up  to  an 
income  of  £500;  then  £120  to  £600;  £70  to  £700;  after  which 
no  deduction  is  allowed.  As  will  be  readily  seen  this  carries 
fairly  regular  degression  up  to  £700,  after  which  the  rate  is 
proportional. 

Progressive  tax  rates  are  often  graduated ;  that  is,  the  rate 
increases  by  grades  or  stages  of  the  amounts  of  the  base,  and  is 
either  proportional  or  fixed  within  each  grade.  From  this 
practice  it  is  very  common  to  speak  of  all  progressive  taxes  as 
"  graduated  taxes."  It  is  probably  safe  to  say  that  the  term 
"  graduated  "  is  more  widely  used  in  this  connection,  and 
perhaps  better  understood  than  the  term  "  progressive." 

Diagram  C  represents  a  somewhat  complex  form  of  the  gradu- 
ated tax.    But  it  is  a  form  which  with  modifications  as  to  details 


8o 


INTRODUCTION  TO  PUBLIC   FINANCE 


and  rates  is  very  frequently  found  and  is  found  in  connection 
with  many  important  taxes.  The  diagram  shows  the  first  ten 
grades  of  the  long  series  of  grades  in  the  Prussian  income  tax, 
as  it  was  in  1891.  It  is  a  form  that  is  intended,  broadly  speak- 
ing, to  result  in  a  series  of  rates  that  impose  a  generally  degres- 
sive tax.  But  on  account  of  the  fixed  rate  within  each  grade, 
and  of  the  change  in  rates  from  grade  to  grade  by  round  numbers 
only,  the  resulting  schedule  is  regressive  within  each  grade,  and 
occasionally  regressive  from  grade  to  grade.  If  the  rates  were 
proportional  within  each  grade,  the  chart  would  show  a  series 
of  horizontal  steps. 


DIAGRAM   C 

First  Ten  Grades  of  the  Prussian  Income  Tax,  1891. 
Degression,  Regression  in  Each  Grade 


Gr.\dual 


p^ 

^r 

-^ 

^ 

J^ 

^ 

p 

,_^ 

■J 

P^  J^" 

MARKS  '  000  »00  1000  1200  1400  1600  1800  2000  2200  2400  2600  2800 

Many  other  forms  of  progressive  rates  have  been  devised. 
They  are  found  in  a  great  many  different  kinds  of  taxes,  but 
are  most  common  in  income  and  inheritance  taxes.  The  theory 
of  progressive  taxation  is  discussed  in  another  connection. 

The  rate  is  regressive  when  it  is  the  reverse  of  the  progressive, 
that  is,  when  it  is  higher  for  the  taxpayer  who  has  a  small 
amount  of  the  base  than  for  one  who  has  a  large  amount.  This 
is  usually  regarded  as  an  unjust  mode  of  taxation,  and  when  it 
occurs,  it  is  usually  an  accidental  or  unintentional  result. 
Sometimes  it  is  brought  about  by  the  evasion  or  partial  evasion 
of  taxation  by  those  who  should  be  the  heavier  taxpayers.  It 
is  occasionally  adopted  intentionally,  as  when  it  is  desired  to 
exterminate  small  saloons  and  drinking  places  by  a  higher 
license  tax  than  is  imposed  on  the  larger  ones.  It  is  safe  to  say 
that  whenever  regressive  rates  are  found,  they  are  either  acci- 
dental or  their  purpose  is  distinctly  non-fiscal.     The  regressive 


THE   VARIOUS   KINDS   OF  TAXES,   FEES,   AND    RATES      8l 

rates  are  in  practice  never  very  regular  in  form,  even  less  so 
than  the  progressive  rates,  but  theoretically  they  can  be  quite 
as  regular  in  form  as  the  latter. 

It  should  be  noted  that  graduated  taxes  are  usually  regres- 
sive within  each  grade ;  that  is,  the  tax  is  a  larger  proportion 
of  the  base  for  a  taxpayer  who  is  just  over  the  lower  limit  than 
for  one  who  is  at  or  near  the  upper  limit  of  the  grade.  Strictly 
speaking,  every  so-called  proportional  tax  is  graduated  and  con- 
sequently regressive  within  each  grade.  This  is  because  the 
recognised  unit  of  the  base,  be  it  a  pound,  a  dollar,  a  penny,  or 
a  cent,  constitutes  a  grade  and  necessarily  takes  the  same  rate 
throughout.  But  when  the  unit  of  the  base  is  small,  this 
graduation  and  regression  is  of  so  little  importance  that  it  is 
ignored. 

Other  Definitions.  —  Impost  is  a  general  term  for  any  tax, 
but  there  is  a  tendency  to  make  it  synonymous  with  indirect 
taxes. 

Customs  duties  are  indirect  taxes  levied  on  the  goods  imported 
into  or  exported  from  certain  territories. 

Excises  are  indirect  taxes  levied  on  goods  produced  or  con- 
sumed within  certain  territorial  Hmits. 

Toll  was  originally  a  general  term  for  many  taxes,  but  it  has 
come  to  have  a  special  meaning,  and  applies  only  to  the  charges 
for  passage  over  roads,  bridges,  canals,  etc. 

A  tax  is  said  to  be  shifted  when  the  taxpayer  reimburses 
himself  from  some  one  else.  The  final  incidence  of  the  tax  is 
the  falling  of  the  burden  upon  some  person  who  does  not  shift  it. 

Two  terms  of  great  importance  in  connection  with  taxation 
are  "  levy  "  and  "  assessment." 

The  term  "  levy  "  covers  all  the  legal  processes  of  imposing 
a  tax  and  making  its  payment  compulsory.  It  is  an  act  of  the 
supreme  authority  of  government.  "  Whatever  else  it  may  be," 
says  Mr.  John  Fiskc,'  "  the  government  is  the  power  that 
taxes."  Conversely  no  tax  can  be  imposed  except  by  govern- 
mental authority.  In  England  and  the  United  States  the 
power  to  levy  taxes  is  a  jealously  guarded  prerogative  of  the 

1  Civil  Government  in  the  United  States,  p.  7. 


82  INTRODUCTION  TO  PUBLIC   FINANCE 

legislative  department.  Two  of  the  commonest  provisions  of 
the  constitutions  of  the  commonwealths  of  the  United  States 
are  in  effect:  (i)  that  "  the  power  of  taxation  shall  never  be 
surrendered  or  suspended  by  any  grant  or  contract  to  which 
the  State  shall  be  a  party."  (2)  "  No  tax  shall  be  levied  except 
in  pursuance  of  law."  Only  in  countries  having  a  system  of 
administrative  law  is  there  a  seeming  departure  from  this 
principle. 

After  the  legislative  or  the  equivalent  authority  has  levied  a 
tax,  the  next  step  is  the  "  assessment."  This  term  covers  the 
acts  and  proceedings  of  the  administrative  ofBcers  in  determining 
the  amount  of  taxes  each  taxpayer  is  to  pay.  By  metonymy 
it  is  often  restricted,  in  common  usage,  to  the  most  important 
process  involved.  Thus  in  the  United  States  in  connection 
with  the  administration  of  the  general  property  tax,  the  term 
"  assessment  "  is  often  used  as  though  it  were  synonymous 
with  the  "  valuation"   of  the  property. 

While  legally  and  logically  the  levy  of  a  tax  involves  fixing 
the  rate,  and  while  theoretically  this  part  of  the  levy  can  no 
more  be  delegated  by  the  legislative  authority  to  any  one  else 
than  can  any  other  part  of  the  levy,  nevertheless,  a  seeming 
delegation  of  this  power  often  occurs.  Thus  some  executive 
department  may  be  instructed  to  ascertain  that  rate  which  will 
yield  a  certain  sum  of  money,  and  this  rate,  although  unknown 
at  the  time  the  law  is  enacted,  is  declared  therein  to  be  the 
legal  rate.  This  is  only  a  seeming  evasion  of  the  fundamental 
principle ;  for  the  executive  department  on  which  this  duty 
is  imposed  has  no  discretionary  powers  and  merely  makes  a 
mathematical  computation,  the  result  of  which  it  has  no  power 
to  alter.  Unquestionably  illegal  is  the  not  uncommon  practice 
of  such  executive  boards  of  rounding  out  the  rate  to  some  whole 
number,  or  to  some  convenient  fraction,  so  as  to  simplify  the 
extensions  on  the  tax  bills.  But  this  is  such  a  trivial  matter 
that  the  courts  do  not  regard  the  tax  levy  as  invalidated  by  such 
a  proceeding. 

The  tax  list  or  roll,  which  is  also  known  by  many  other 
names,  contains  the  record  of  the  assessment.     It  is  a  legal 


THE   VARIOUS   KINDS  OF  TAXES,   FEES,   AND   RATES      83 

document  of  the  first  importance.  It  is  in  force  and  effect 
a  warrant,  compelling  payment,  and  the  basis  of  all  legal  tax 
proceedings.  In  many  cases,  notably  on  the  continent  of 
Europe,  these  Usts  are,  for  certain  taxes,  elaborate,  permanent 
or  partly  permanent  records,  which  may  serve  various  legal 
purposes  as  well  as  the  fiscal,  as  for  example  the  record  of  titles, 
and  are  called  "  cadastres."  When  the  same  tax  is  used  by 
several  different  departments  of  government,  as,  for  example, 
by  the  cities,  counties,  pro\dnces,  or  other  divisions  of  local 
governments  and  also  by  the  State  or  central  government,  the 
initial  tax  fist  or  the  original  may  be  retained  and  filed  in  each 
local  office  or  tax  bureau,  and  a  duplicate  thereof  sent  up  to  the 
higher  department  or  division  of  government.  When  a  number 
of  these  duplicates  are  brought  together,  the  combined  list  is 
designated  by  some  distinguishing  name,  such  as  the  "  grand 
dupHcate,"  the  "  grand  list,"  or  some  other  similar  term. 

"  Rate,"  when  used  alone  without  the  prefix  "  tax,"  is  a  term 
appHed  in  England  to  many  local  taxes,  as  the  "  poor  rates," 
or  simply  "  the  rates,"  and  in  that  country  often  carries  the 
distinction  between  local  taxes  and  general  taxes.  In  America 
local  taxes  for  the  maintenance  of  the  water  systems  are  not 
infrequently  called  "  water  rates,"  but  the  term  does  not  carry 
the  same  meaning  as  in  England. 


CHAPTER   III 
THE  TAX   SYSTEM 

Section    i.    Taxes  are   Combined    into    a    System.  —  No 

nation  has  ever  found  it  feasible  to  adopt  any  single  tax  as  the 
sole  source  of  its  income.  No  nation  at  all  advanced  in  civilisa- 
tion has  attempted  to  conduct  its  government  entirely  from 
the  earnings  of  its  domains  or  industries.  Every  civilised 
nation  of  to-day  combines  the  three  sorts  of  revenues,  those 
produced  by  its  own  activities  and  those  obtained  from  taxation 
and  from  fees.  And  furthermore,  no  nation  attempts  to  exist 
with  only  one  of  each  of  these  kinds  of  revenues.  These  dif- 
ferent forms  are  combined  into  a  "  system  "  or  general  scheme, 
which  conforms  more  or  less  closely  to  the  general  ideal  of 
justice  which  may  have  been  adopted  by  the  nation.  To 
judge  of  the  justice  or  expediency  of  any  tax  it  should  be  studied 
in  its  place  in  the  "  system."  We  have  already  seen  the  two 
main  theories  as  to  the  proper  measure  of  taxation :  the  one, 
that  taxation  should  be  measured  by  benefit ;  the  other,  that  it 
should  be  measured  by  faculty.  A  perfect  system  would  so 
combine  the  different  forms  that  the  total  burden  imposed 
would  be  in  accord  with  the  ideal  adopted. 

The  Dream  of  a  Single  Tax.  —  There  is  a  constant  tendency 
toward  the  simplification  of  tax  systems,  although  most  modern 
systems  are  still  extremely  complicated.  It  is  the  dream  of 
financial  theorists,  and  has  been  ever  since  the  science  began, 
and  it  is  the  aim  of  many  would-be  reformers,  to  find  a  single 
tax  that  will  furnish  all  the  necessary  funds  for  the  support  of 
the  government.  The  physiocratic  impot  unique  on  the  produit 
net  is  well  known,  as  is  also  the  justification  therefor.  It  is 
also  well  known  wherein  this  fails.     Modern  proposals  generally 

84 


THE  TAX  SYSTEM  85 

involve  something  more  than  mere  tax  reform.  The  socialistic 
demand  for  a  single,  exclusive  income  tax  with  a  progressive 
rate  is  advanced  with  a  hope  of  effecting  a  redistribution  of  the 
wealth  of  the  world.  Henry  George's  well-known  scheme  for 
a  single  tax  on  land  has  a  similar  ulterior  purpose.  His  object 
is  to  free  industry  from  trammels  which  he  supposes  are  due 
to  the  appropriation  of  land  values  by  private  individuals.  In 
form  his  proposition  is  not  very  unlike  that  of  the  Physiocrats. 
He  is  an  extreme  individualist,  but  he  aims,  hke  the  socialists, 
at  a  new  distribution  of  property.  Of  these  two  modern  schemes 
for  a  single  tax  the  first  is  perfectly  feasible  from  the  fiscal  point 
of  view.  Such  a  tax  could  probably  be  administered  and  could 
be  made  to  yield  ample  revenue.  It  fails,  however,  to  answer 
the  simplest  requirements  of  justice.  For  example,  it  would 
not,  unless  our  whole  scheme  of  economic  Hfe  were  first  altered, 
seem  just  that  the  man  whose  property  was  benefited  by  the 
grading  and  metalling  of  a  street  should  be  entirely  free  from 
a  special  charge  for  the  special  benefit.  The  scheme  is  inexpe- 
dient for  three  reasons :  (i)  it  presupposes  for  its  successful 
administration  a  method  of  distribution  of  wealth  very  dif- 
ferent from  that  which  the  world  now  has ;  (2)  it  demands  a 
perfection  in  the  technique  of  administration  as  yet  absolutely 
unattainable ;  (3)  it  would  need,  in  order  to  be  fairly  adminis- 
tered, more  honesty  than  men  have  yet  shown  in  their  dealings 
with  the  government.  None  of  these  reasons  militate  in  the 
least  against  the  incorporation  of  an  income  tax  in  the  tax  sys- 
tem, beside  other  taxes.  They  apply  only  to  its  use  as  the  sole 
source  of  revenue. 

Mr.  Louis  F.  Post,  official  lecturer  for  the  Single-tax  League, 
gives  the  following  explanation  of  the  second  most  prominent 
form  of  a  single  tax. 

"  The  practical  form  in  which  Henry  George  puts  the  idea 
of  appropriating  economic  rent  to  the  common  use  is  '  To  abolish 
all  taxation  save  that  upon  land  values.^  This  is  now  generally 
known  as  '  the  single  tax.'  Under  its  operation  all  classes  of 
workers,  whether  manufacturers,  merchants,  bankers,  profes- 
sional men ,  clerks,  mechanics,  farmers,  farm-hands,  or  other  work- 


86  INTRODUCTION   TO   PUBLIC   FINANCE 

ing  classes,  would,  as  such,  be  wholly  exempt.  It  is  only  as 
men  who  own  land  that  they  would  be  taxed,  the  tax  of  each 
being  in  proportion,  not  to  the  area,  but  to  the  value  of  his  land. 
And  no  one  would  be  compelled  to  pay  a  higher  tax  than  others 
if  his  land  were  improved  or  used  while  theirs  was  not,  nor  if 
his  were  better  improved  or  better  used  than  theirs.  The 
value  of  its  improvements  would  not  be  considered  in  estimat- 
ing the  value  of  a  holding ;  site  value  alone  would  govern.  If 
the  site  rose  in  the  market,  the  tax  would  proportionately  in- 
crease; if  that  fell,  the  tax  would  proportionately  diminish."  ^ 
A  full  discussion  of  the  economic  and  social  effects  of  Henry 
George's  single  tax  would  carry  us  far  beyond  the  scope  of  this 
book.  The  argument  for  the  single  tax,  as  a  mode  of  taxation 
alone,  is  far  from  complete  by  itself.  In  so  far  as  it  can  be 
stated  separately  it  has  been  well  given  by  Fillebrown.^  His 
statement  is  as  follows:  "  a.  The  site  value  of  land  is  a  social 
product,  b.  A  land  tax  cannot  be  '  shifted.'  c.  The  selHng 
value  of  the  land  is  an  untaxed  value."  From  a  he  would 
have  us  draw  the  conclusion  that  the  ground  rent  should  belong 
to  the  community  as  a  whole.  This,  of  course,  involves  the 
economic  argument  for  the  single  tax.  From  b  he  would  have 
us  infer  that  the  only  person  affected  would  be  the  landlord, 
and  from  c  that  "  if  all  taxes  are  ultimately  taken  from  rent, 
it  follows  that  in  the  course  of  two  or  three  generations  taxation 
may  cease  entirely  from  being  a  burden  upon  any  one."  ^  In 
the  first  edition  of  this  book  there  was  a  discussion  of  the  prob- 
able sufficiency  of  the  revenues  which  could  be  obtained  from 
this  source,  and  figures  were  presented  from  which  the  author 
was  inclined  to  draw  the  conclusion  that  the  entire  ground  rent 
would  in  most  communities  be  less  than  the  revenues  now  being 
spent  by  the  government.  Those  figures  have  been  questioned, 
and  it  is  difficult,  if  not  impossible,  to  get  any  that  both  sides 
to  the  controversy  would  be  willing  to  accept.  But  it  appears 
to  the  author  on  more  mature  consideration  that  the  point  is 

1  "The  Single    Tax,"  p.   i.     Henry  George,  Progress  and  Poverty,  Bk.  VIII, 
Chap.  II. 

^  A.  B.  C.  of  Taxation,  p.  155.  '  Op.  cit.,  p.  163. 


THE  TAX  SYSTEM  87 

not  quite  pertinent.  Because,  if  it  were  admitted  on  the  one 
hand  that  all  taxes  other  than  those  on  land  values  were  unjust, 
then  it  would  become  the  duty  of  the  government  to  keep  its 
expenditures  within  the  revenues  available.  But  on  the  other 
hand  some  of  the  ablest  among  the  modern  disciples  of  Henry 
George  do  not  lay  full  stress  on  the  word  "  single."  "It  is  a 
question  of  applying  land  values  to  the  common  use  as  far  as 
they  will  go,  or  as  much  of  them  as  may  be  needed,  as  the  case 
may  prove  to  be."  ^ 

Aside  from  any  question  as  to  the  probable  sufficiency  or 
insufficiency  of  the  revenues,  the  single  tax  presents  a  great 
many  practical  administrative  difficulties  for  the  solution  of 
which  no  detailed  suggestions  have  been  offered.  Thus  we 
cannot  easily  foresee  how,  under  the  changed  conditions,  the 
assessment  would  be  made,  or  how  the  actual  ground  rent 
would  be  ascertained.  It  is  especially  difficult  to  see  how  the 
revenues  would  be  apportioned  among  the  various  divisions  of 
government,  or  what  would  be  the  assignment  of  governmental 
functions  to  different  divisions  of  government  under  the  new 
regime.  All  these  difficulties  make  governments  hesitate  to 
plunge  into  so  comprehensive  a  change,  the  outcome  of  which 
it  is  so  difficult  to  foresee. 

If  on  economic  grounds,  or  on  the  ground  of  general  public 
pohcy,  we  deny  that  any  such  fundamental  changes  in  the 
modern  system  of  land  ownership,  possession,  or  enjoyment 
are  desirable,  or  that  the  "  private  appropriation  of  ground 
rent  "  is  in  any  way  a  wrong,  or  the  cause  of  any  social  or 
economic  evils,  then  the  case  against  the  single  tax  is  clear. 
It  would  be  fundamentally  unjust  because  it  lays  an  unduly 
heavy  burden  on  certain  classes  and  allows  others  to  go  free 
or  at  least  to  enjoy  a  very  considerable  abatement  in  their 
contributions  to  the  common  ends  of  society. 

Increment  Value  Land  Taxes.  —  An  apparent  application 
of  the  single-tax  idea  is  found  in  the  recent  extension  of  a 
system  of  special  taxes  on  the  increment  of  land  values,  espe- 

1  Louis  F.  Post,  The  Single  Tax,  p.  86.  Quoted  approvingly  by  Fillebrown,  op. 
cit.,  p.  154. 


88  INTRODUCTION  TO  PUBLIC   FINANCE 

daily  in  large  cities  in  Germany.  As  these  cities  have  grown 
rapidly  in  population  there  has  come  a  corresponding  increase 
in  land  values.  In  many  cases  the  existing  tax  systems  have 
been  insufficient  to  reach  this  added  tax-paying  capacity  in  a 
manner  that  seemed  adequate  under  the  new  conditions,  and 
consequently  new  special  methods  of  reaching  it  have  been 
devised.  The  special  taxes  are  usually  based  on  the  so-called 
"  unearned  "  increment  in  value  and  not  on  any  increase  due  to 
actual  outlay  or  improvements  made  by  the  owner.  They  are 
usually  levied  at  the  time  of  a  transfer,  when  the  actual  incre- 
ment of  value  appears.  The  rates,  while  often  sharply  pro- 
gressive according  to  the  percentage  of  unearned  increment 
over  cost,  are  not  so  heavy  as  to  take  the  entire  increment. 
They  accrue,  as  a  rule,  to  the  benefit  of  the  cities  only.  These 
taxes  are  therefore  unlike  the  "  single  tax  "  in  that  they  do 
not  in  any  event  take  the  whole  of  the  ground-rent,  whether 
as  an  annual  payment  or  in  capitalised  form. 

Every  tax  tends  to  repress  the  development  of  the  particular 
phenomenon  on  which  it  rests.  A  single  tax  of  any  kind  will 
tend  to  defeat  its  own  ends  by  repressing  the  existence  of  the 
phenomenon  which  gives  the  signal  for  its  assessment.  For 
example,  in  Mexico  land  is  not  taxed,  but  if  the  farmer  kills 
a  cow,  or  sells  a  crop,  he  is  taxed.  Naturally  this  discourages 
any  extension  of  the  uses  of  land  that  involve  this  disagreeable 
consequence.  The  experience  of  nations  which  has  led  them  to 
diversify  the  forms  of  their  taxation  is,  therefore,  supported 
by  theoretical  considerations.  The  tax  system  of  the  United 
States  is  still,  and  the  tax  systems  of  all  European  nations  have 
been,  until  recently,  and  are  yet  in  great  measure,  mere  acci- 
dental jumbles  of  different  historical  taxes,  which  are  retained 
simply  for  the  revenue  that  they  yield  and  not  because  of  any 
belief  in  their  justice.  It  is  not  often  that  nations  are  rich 
enough  to  enjoy  what  Professor  Cohn  has  well  called  the 
''  luxury  of  reform  for  reform's  sake."  Their  reforms  have 
been  most  often  undertaken  for  the  sake  of  increased  reve- 
nues. 

To  be  sure,  the  rough  edges  have  been  somewhat  worn  away 


THE  TAX   SYSTEM  89 

by  the  friction  of  economic  forces,  and  the  process  of  tax  shift- 
ing has  in  some  instances  removed  some  of  the  worst  injustices. 
But  examined  from  the  standpoint  of  some  ideal  system,  the 
tax  systems  of  many  modern  nations  fail  woefully.  It  matters 
little  which  ideal  be  the  one  held  up  by  which  to  test  them ; 
whether  it  be  that  of  the  benefit  theory,  or  that  of  the  faculty 
theory,  the  failure  is  the  same. 

Sec.  2.  Theories  of  Justice  in  Taxation.  —  What  in  the 
opinion  of  nations  constitutes  the  idea  of  correct  or  just  taxa- 
tion ?  The  answer  to  this  question  is  to  be  sought  in  the  theories 
of  taxation  that  have  found  favour,  and  are  generally  contained 
in  the  writings  of  economists  and  financiers.  The  Physiocratic 
answer  was,  we  have  seen,  inadequate.  The  benefit  theory 
would  say  that  each  citizen  should  pay  according  to  the  benefit 
he  receives.  What  is  the  benefit  and  how  is  it  measured  ?  The 
common  benefits  are,  clearly,  the  peaceful  enjoyment  of  life, 
liberty,  and  property.  The  protection  the  State  affords  to 
life  and  liberty  is  theoretically  equal  for  all ;  that  to  property 
might  be  considered  to  vary  as  the  amount  of  property  varies.^ 
A  uniform  tax  on  each  poll  for  the  first  two  benefits,  and  a  pro- 
portional tax  on  property,  would  seem  to  answer  the  require- 
ments of  this  theory  with  sufficient  accuracy.  But  the  relatively 
small  returns  from  the  poll  taxes  and  the  great  expense  and  fric- 
tion of  collecting  them  soon  led  to  their  partial  abandonment. 
Property  then  remained  the  chief  basis  under  this  theory.  The 
value  of  property  seemed  clearly  to  depend  on  its  revenue- 
yielding  power.  It  is  a  matter  of  comparative  indifference 
which  is  taken.  Hence  the  idea  embodied  in  the  famous  dictum 
of  Adam  Smith :  "  The  subjects  of  every  State  ought  to  con- 
tribute toward  the  support  of  the  government,  as  nearly  as 
possible,  ...  in  j)roportion  to  the  revenues  which  they 
respectively  enjoy  under  the  protection  of  the  State."  -  But 
here  again  as  the  industrial  population  separated  from  the  soil 

*  The  benefit  theory  has  been  illogically  developed  into  a  defence  of  progressive 
taxation.  See  Seligman,  Progressive  Taxation,  2d  ed.,  p.  181  fl.  I  have  not  included 
this  illogical  side  in  the  discussion. 

2  Bk.  V,  Chap.  II,  Part  II.  On  the  various  interpretations  of  this  passage,  see 
Seligman,  op.  cit.,  p.  150. 


90  INTRODUCTION  TO  PUBLIC  FINANCE 

and  a  large  body  of  citizens  arose,  who  had  no  land  and  little 
personal  property,  and  who  could  ill  afford  to  part  with  any 
of  their  earnings,  humanity  and  expediency  urged  the  exemp- 
tion of  the  minimum  of  subsistence.  It  cost  too  much  and 
caused  too  much  bitterness  to  collect  taxes  from  those  having 
only  the  bare  necessities.  Then  came  Ricardo's  suggestion, 
"  The  power  of  paying  taxes  is  in  proportion  to  the  net,  and 
not  in  proportion  to  the  gross  revenue."  The  items  that  were 
to  be  deducted  were  the  costs  of  production,  among  which 
were  then  counted  the  bread  and  meat  for  the  labourers,  which 
were  regarded  very  much  as  so  much  fuel  shovelled  into  the 
furnace  of  a  human  machine.  Hence  it  was  argued  that  it 
would  be  too  burdensome  to  production  to  tax  what  was  neces- 
sary to  maintain  the  productive  power  of  the  workers.  A  certain 
amount  of  income,  therefore,  should  be  exempt ;  for  if  taxed, 
the  tax  would  certainly  be  shifted.  Fortunately,  according 
to  the  prevalent  theory  of  wages,  the  amount  to  be  exempted 
would  remain  fixed,  or  nearly  so,  advancing,  if  at  all,  very 
slowly.  So  that  all  incomes  over  a  fixed  amount  were  to  be 
taxed  proportionally,  since  the  benefit  to  such  individuals  as 
possessed  incomes  above  the  chosen  minimum  was  supposed 
to  be  in  exact  proportion  to  the  amount  in  excess  of  the  mini- 
mum. Stated  broadly,  this  theory  was  as  follows :  All  taxes 
must  be  proportioned  to  benefit.  Certain  classes  only  are 
benefited,  namely,  those  having  income  over  a  certain  amount ; 
that  is,  over  the  minimum  of  subsistence.  They  should  be 
taxed  on  the  amount  above  that  minimum  of  subsistence.  It 
would  seem,  then,  that  the  money  spejit  in  protection  of  the 
workers  who  lived  on  the  minimum  of  subsistence  was  to  be 
treated  as  if  of  benefit  to  the  other  classes.  This  puts  the 
worker  in  much  the  same  category  with  the  pauper  for  whom  the 
State,  from  reasons  of  humanity,  decides  that  it  is  worth  while 
to  care.  With  a  clearer  perception  of  the  character  of  pro- 
duction and  a  realisation  of  the  fact  that  the  worker  was  a  man, 
the  satisfaction  of  whose  wants,  even  if  they  did  not  exceed  the 
minimum  of  subsistence,  was  yet  as  important  as  the  satisfac- 
tion of  the  higher  wants  of  other  classes,  came  a  realisation 


THE  TAX  SYSTEM  9I 

of  the  inadequacy  of  this  theory.  It  is  now  quite  generally 
abandoned,  except  as  the  legal  theory  in  America. 

Perhaps  the  best  statement  of  tlie  United  States  legal  theory 
of  what  constitutes  the  just  measure  of  taxation  is  given  by 
Judge  Cooley.^  "  If  it  were  practicable  to  do  so,  the  taxes 
levied  by  the  government  ought  to  be  apportioned  among  the 
people  according  to  the  benefit  which  each  receives  from  the 
protection  the  government  affords  him ;  but  this  is  manifestly 
impossible.  The  value  of  life,  liberty,  and  of  the  social  and 
family  rights  and  privileges  cannot  be  measured  by  any  pecuni- 
ary standard ;  and  by  the  general  consent  of  civilised  nations, 
income  or  the  sources  of  income  are  almost  universally  made  the 
basis  upon  which  the  ordinary  taxes  are  estimated.  This  is 
upon  the  assumption,  never  wholly  true  in  point  of  fact,  but 
sufficiently  near  the  truth  for  the  practical  operations  of  govern- 
ment, that  the  benefit  received  from  the  government  bears  some 
proportion  to  the  property  held,  or  the  revenue  enjoyed  under 
its  protection ;  and  though  this  can  never  be  arrived  at  with 
accuracy,  through  the  operation  of  any  general  rule,  and  would 
not  be  wholly  just  if  it  could  be,  experience  has  given  us  no 
better  standard,  and  it  is  applied  in  a  great  variety  of  forms, 
and  with  more  or  less  approximation  to  justice  and  equality. 
But,  as  before  stated,  other  considerations  are  always  admissible; 
what  is  aimed  at  is,  not  taxes  strictly  just,  but  such  taxes  as  will 
best  subserve  the  general  welfare  of  political  society." 

Benefit  as  a  measure  of  taxation  is  therefore  according  to  the 
admission  of  one  of  its  strongest  advocates  inadequate.  Only 
in  special  instances  can  benefit  be  directly  measured.  There, 
of  course,  it  has  been  and  will  remain  the  basis  of  taxation,  at 
least  until  the  State  shall  decide  that  the  special  benefit  has  been 
merged  in  the  common  benefit. 

Sec.  3.  The  Faculty  Theory.  —  But  the  faculty  theory,  while 
offering  some  difficulties,  is  on  the  whole  more  satisfactory. 
The  faculty  theory  is  well  illustrated  by  the  history  of  the 
English  poor  law,  to  which  reference  has  already  been  made. 
At  first  the  attempt  was  made  to  supply  the  wants  of  the  poor 

1  Taxation,  p.  24. 


92  INTRODUCTION  TO  PUBLIC   FINANCE 

by  voluntary  contributions.  But  it  soon  became  apparent  that 
all  were  not  contributing  "  as  God  had  prospered  them."  The 
idea  that  the  support  of  the  poor  was  a  benefit  to  the  other 
classes,  except,  perhaps,  so  far  as  almsgiving  was  supposed  to 
insure  a  man's  salvation,  did  not  appeal  to  the  legislators. 
They  anxiously  avoided  making  the  contribution  compulsory 
because  it  would  be  hard  to  justify  such  a  policy  by  pointing 
to  any  benefit.  But  they  felt  that  fairness  demanded  that  each 
should  contribute  according  to  his  ability.  Indeed,  this  was 
their  understanding  of  the  Divine  command  upon  which  they 
were  consciously  acting.  The  justices  of  peace  were,  without 
any  very  definite  instructions  as  to  the  mode  of  procedure, 
authorised  to  see  that  each  person  contributed  fairly  according 
to  his  abihty.^ 

What  then  constitutes  ability?  The  original  idea  seems  to 
have  been  that  the  possession  of  property  constituted  ability. 
But  the  value  of  property  depends  upon  its  power  to  yield  the 
owner  a  revenue.  If  we  consider  landed  property  only,  we  find 
historically  the  greatest  uncertainty  as  to  whether  men  should 
be  assessed  according  to  some  estimate  of  the  salable  value  or 
according  to  its  annual  yield.  This  uncertainty  arose  from  the 
conditions  of  the  times.  The  salable  value  of  landed  property 
was,  of  course,  determined  by  the  annual  produce  or  revenue- 
yielding  power.  In  the  middle  ages  land  was  not  salable 
property ;  hence,  it  was  the  custom  to  value  it  for  purposes  of 
taxation  according  to  the  annual  produce,  or  the  annual  rental 
value,  which  was  determined  by  the  produce.  The  history 
of  taxation  in  the  American  colonies  is  very  instructive  as  to 
the  method  of  determining  what  constitutes  faculty  or  ability 
to  pay.  Here  for  the  first  time  in  history,  or  at  least  since  the 
fall  of  Rome,  was  a  country  that  enjoyed  almost  absolute  free 
trade  in  land.  When  the  Connecticut  proprietors  bought 
in  fee  simple  lands  in  Vermont,  which  they  had  never  seen, 
to  be  sold  again  on  cash  terms  to  settlers,  whom  they  had  never 
seen,  often  for  prices  which  the  same  lands  would  not  bring 
to-day,  they  were  doing  what  was  not  possible  in  any  European 
1  Ashley,  Economic  History,  II,  p.  360. 


THE  TAX   SYSTEM  93 

country  at  the  time  and  what  is  only  partly  possible  in  most 
of  them  to-day,  i.e.  selling  land  as  one  sells  wheat  or  any  other 
commodity.  The  New  England  colonists,  therefore,  had  the 
choice  of  two  methods  of  assessing  property  in  land :  they 
could  follow  the  older  method  to  which  they  were  accustomed 
at  home,  which  assessed  the  rental  value  of  the  property,  or  they 
could  take  some  method  suggested  by  the  fact  that  lands  were 
really  sold,  in  fee  simple,  for  a  price.  In  general  they  chose 
the  latter,  although  there  are  numerous  traces  of  the  old  method 
both  in  the  tax  laws  and  in  other  regulations  that  are  of  a 
similar  character.  It  is  unfortunate  that  none  of  the  investi- 
gations into  the  history  of  this  period  have  been  specially 
directed  toward  this  point.  Vermont  furnishes  one  of  the  best 
examples  of  the  principles  underlying  the  colonial  idea  of  taxa- 
tion. There  the  conditions  were  very  simple.  Taxation  1  was 
intended  to  cover  all  male  inhabitants.  Every  male  between 
16  and  60  years  of  age,  with  a  few  definite  exceptions,  was 
"  rated  "  at  £6  on  his  person.  That  is,  everybody  was  con- 
sidered to  be  able  to  contribute  something,  whether  he  had 
property  or  not.  Then  the  different  items  of  property  were 
"  set  in  the  list  "  over  against  the  name  of  the  owner  at  fixed 
rates.  For  example,  each  acre  of  improved  land,  105. ;  an  ox 
or  steer  four  years  old,  £4 ;  three  years  old,  £3  ;  two  years  old, 
£2  ;  one  year  old,  £1 ;  a  horse  three  years  old  or  over,  £3  ;  all 
"  horse  kind  "  two  years  old,  £2.  Money  on  hand,  or  due,  was 
listed  at  £6  in  the  £100.  Then  all  persons  were  listed  "  for 
their  faculty,"  according  to  occupation  and  earnings :  attor- 
neys at  from  £50  upwards,  as  the  value  of  their  practice  in- 
creased ;  all  tradesmen,  traders,  and  artificers  "  proportion- 
ally to  their  gains  and  returns."  Other  items  of  property  were 
entered  in  the  list  in  a  similar  way  at  fixed  rates.  The  sum  total 
of  all  the  difi"erent  items  over  against  the  name  of  each  person 
was  supposed  to  represent  his  total  ability  or  faculty.  The 
notable  thing  about  all  this  is  that  only  revenue-yielding  prop- 
erty was  listed.  It  was  not  a  property  tax  purely,  nor  an  in- 
come tax.  But  the  thing  which  it  sought  to  ascertain  was  how 
1  Wood,  History  0/  Taxation  in  Vermont.     Columbia  College  Studies,  IV,  3. 


94  INTRODUCTION  TO  PUBLIC   FINANCE 

much  ability  or  faculty  each  person  had.  All  property  that  was 
regarded  as  indicative  of  faculty  was  listed,  and  many  other 
things  that  were  also  indicative  of  faculty  were  included.  Later, 
however,  Vermont  adopted  a  form  more  nearly  in  accord  with 
the  idea  that  property  alone  indicates  faculty. 

There  are,  then,  two  ways  of  ascertaining  faculty.     In  the 
one  the  base  is  primarily    the   property    irrespective    of    the 
revenue  the  property  yields.     In  the  other  it  is  income  from 
property   or   from   other  sources.     There    are   also    two    ways 
of  completing  the  measurement :  We  may  assume  that  faculty 
is    proportional    to  [property    or    income ;    that    is,    that    it 
increases    in    exactly    the    same    ratio    as    property    and    in- 
come  increase.     Or  we   may   assume   that  it  increases  more 
rapidly  than  either  property  or  income.     The  choice  of  base 
and  the  choice  of  rate  have  given  rise  to  long  and  weary  dis- 
cussions and  hair-sphtting  distinctions.     In  regard  to  the  first, 
it  is  sufficient  to  say  that  at  present  the  most  widely  accepted 
view  is  that,  from  the  standpoint  of  abstract  justice,  income 
forms  a  better  starting-point  for  the  determination  of  faculty 
than  property.     But  we  cannot  avoid  entering  the  discussion 
as  to  whether  faculty  is  in  proportion  to  income  or  increases 
more  rapidly.     The   widespread   advance   of   democracy,  and 
of  sympathy  for  those  in  the  lower  walks  of  life,  led  to  the 
desire  to  justify  if  possible  the  exemption  of  smaller  incomes, 
especially  the  minimum  of  subsistence,  and  this  desire  found 
means  of  fulfilment  in  the  newer  theories  of  value,  the  con- 
ception of  marginal  utility,  and  the  discussion  as  to  the  relative 
urgency  of  different  wants.     If  we  classify  certain  wants  as 
absolute  necessities,  then  the  conclusion  is  near  that  the  possessor 
of  the  minimum  of  subsistence  has  no  ability  to  pay  taxes.     The 
possessor  of  a  great  deal  more  than  the  minimum  of  subsistence 
can  in  proportion  bear  more  taxes  than  one   who    has    only 
enough  to  obtain  a  few  comforts  in  addition  to  the  necessities. 
That  is,  the  test  of  justice  is  found  in  equality  of  sacrifice,  and 
we  impose  a  greater  sacrifice  if  we  take  away  from  the  labouring 
man  with  $1500  a  year  10  per  cent  of  his  incomie  than  we  impose 
on  the  capitaHst  with  $15,000  annual  income  by  taxing  him 


THE   TAX   SYSTEM  95 

in  the  same  proportion.  Moreover,  if  we  look  upon  faculty 
as  identical  with  general  economic  power,  then  it  is  clear  that, 
as  the  control  of  wealth  increases,  the  ease  of  further  increase 
is  greater.  Thus  it  is  easier  relatively  for  the  millionaire  to 
double  his  fortune  than  it  is  for  the  daily-wage  earner  to  rise 
to  independence. 

Only  slightly  different  in  form  is  the  so-called  "  leave-them- 
as-you-find-them  "  theory  of  justice  in  taxation.  That  is, 
that  taxes  should  be  so  imposed  that  when  all  have  paid  them, 
each  will  be  left  in  the  same  position,  relative  to  his  fellows, 
as  he  was  before  the  payment. ^ 

Sec.  4.  The  Compensatory  and  Socialistic  Theories.  — 
There  are  two  other  theories,  which,  independent  of  the  idea 
of  sacrifice  or  of  increased  economic  power,  attempt  to  justify 
a  higher  rate  of  taxation  for  higher  incomes  than  for  lower. 
These  two  theories  adopt  the  hypothesis  that  the  common 
benefit  is  equal,  and  demand  that  the  inequalities  in  wealth 
should  be  removed  in  order  to  make  it  easily  possible  to  tax 
according  to  this  equal  benefit.  There  are,  first,  those  who 
argue  that  the  inequalities  in  wealth  are  due  in  large  measure 
to  the  action  of  the  State,  and  hence  the  State  is  justified  in 
abandoning  the  idea  of  equality  of  taxation  and  in  taxing 
those  who  have  much  wealth  more  heavily  than  others,  for 
they  have  gained  from  the  State's  own  action.  This  has  been 
called  the  compensatory  theory.  Others,  again,  starting  from 
the  same  hypothesis,  urge  that  taxation  cannot  be  equal,  be- 
cause evil  economic  forces  have  changed  the  abilities  of  the 
taxpayers  and  that  it  is  the  duty  of  the  State  to  offset  these 
forces  by  readjusting  wealth  through  taxation.  This  has  been 
called  the  socialistic  theory.  Neither  of  these  theories  can 
justly  be  called  scientific;  they  both  cut  loose  entirely  from 
existing  conditions. 

After  a  careful  study  of  all  the  modern  theories  of  justice  in 
taxation  we  are  forced  to  the  conclusion  that  none  of  them  is 
superior  in  any  way  to  the  noble  maxim  or  canon  of  Manu 

'  The  student  will  do  well  to  read  carefully  the  three  essays  by  Edgeworth  on 
the  "Pure  Theory  (jf  Taxation"  in  tlic  1807  volume  of  the  Economic  Journal. 


96  INTRODUCTION  TO  PUBLIC   FINANCE 

quoted  at  the  very  beginning  of  this  book  in  the  unnumbered 
chapter  entitled  "  General  Considerations." 

The  Practical  Application  of  Progression.  —  These  theories 
all  demand  that  the  rich  should  be  taxed  proportionately  more 
heavily  than  the  poor.  This  principle  is  not  always  successfully 
applied,  but  there  is  no  country  which  does  not  attempt  to  apply 
it.  How  is  the  attempt  made?  There  are  several  ways. 
First,  heavier  taxes  are  imposed  on  luxuries  than  on  necessities. 
There  are  heavier  taxes  on  silk  shirts  and  stockings  than  on 
cotton  ones,  heavier  taxes  on  broadcloth  than  on  blue  jeans, 
heavier  taxes  on  fine  flavored  cigars  than  on  common  plug 
tobacco.  Second,  a  series  of  taxes  cumulate  on  the  rich  many  of 
which  do  not  apply  to  the  poor.  The  poor  man  pays  his  lighter 
indirect  taxes  as  above,  a  poll  tax,  and,  may  be,  a  small  prop- 
erty or  income  tax.  The  rich  man  pays  the  same  or  heavier 
indirect  taxes  and  poll  taxes  and  proportional  property  taxes 
and  then  a  whole  series  of  other  taxes  such  as  heavier  (propor- 
tionately) property  and  income  taxes,  together  with  business 
taxes,  inheritance  taxes,  capital  taxes,  and  often  still  others. 
Third,  a  differentiation  is  made  within  each  tax  by  levying 
heavier  or  progressive  rates  on  the  rich.  Thus  incomes  of  small 
amounts  may  be  entirely  exempt,  incomes  of  moderate  amounts 
may  be  taxed  only  a  few  per  cent  while  large  incomes  may  be 
taxed  many  more  per  cent. 

In  working  out  progression,  under  the  third  method,  two 
important  questions  arise.  One  is :  In  what  kinds  of  taxes 
may  a  progressive  tax  rate  be  used  ?  The  other  is :  How  high 
can  the  progression  be  carried? 

Progression  Logically  Applies  to  Direct  Personal  Taxes  Only. 
— The  answer  to  the  first  one  is  :  progressive  tax  rates  may  be 
logically  applied  only  to  a  direct  personal  tax  so  framed  as  to 
be  based  on  some  clear  index  of  ability  to  pay.  That  pro- 
gressive rates  are  wholly  out  of  place  in  customs  duties  and 
excises  is  so  obvious  that  a  mere  statement  that  it  is  so  suffices. 
Whether  the  import  be  champagne  or  coal,  the  rate  per  case  or 
per  ton  is  the  same  for  a  shipload  as  for  one  case  or  one  ton. 
But  progressive  rates  are  in  place  for  income  taxes,  inheritance 


THE  TAX   SYSTEM  97 

taxes,  and  for  property  taxes  when  in  the  last  case  the  base  is  a 
man's  aggregate  estate.  But  if  the  property  tax  is  one  on 
things  ownable,  regardless  of  the  owner,  progression  is  out  of 
place.  Ordinarily  there  is  little  difficulty  in  deciding  whether 
progression  is  appHcable,  but  sometimes  the  decision  becomes 
difficult.  A  poll  tax  is  ordinarily  not  progressive,  despite  the 
fact  that  it  is  personal.  But  sometimes  the  assumption  has  been 
made  that  some  polls  or  heads  are  different  from  others.  Then 
the  rate  may  be  made  progressive  and  a  Duke's  or  Earl's  head 
may  be  taxed  more  heavily  than  a  peasant's.  On  the  other 
hand,  while  a  tax  on  the  shares  of  the  heirs  or  legatees  of  prop- 
erty left  by  a  decedent  may  properly  be  progressive,  it  is 
wholly  illogical  to  impose  progressive  rates  on  the  entire  estate 
left  by  him.  For  that  means  that  the  privilege  of  inheriting 
$500,  say  from  a  million-dollar  estate,  is  worth  more  than  that 
of  inheriting  the  same  amount  from  a  $1000  estate.  Although 
the  principle  is  clear,  legislators,  having,  perhaps,  some  diffi- 
culty in  grasping  progression  at  all,  often  attempt  ridiculous 
appHcations.  They  are  sometimes  prone  to  try  to  apply  it  to 
any  new  direct  tax,  whether  personal  or  not.  Thus  it  was 
appUed  to  the  excess  profits  tax  in  the  United  States  with  the 
most  astonishing  lack  of  sense. 

How  High  May  Progression  Go  ?  —  The  second  question, 
how  high  may  the  rates  rise?  has  never  been  answered  by  a 
definite  rule.  McCulloch  very  correctly  said  when  we  abandon 
proportion  "  we  are  at  sea  without  rudder  or  compass."  Pro- 
fessor Seligman,  after  surveying  all  the  theories  and  practices 
in  the  matter  of  progressive  rates,  said :  "  If,  therefore,  we  sum 
up  the  whole  discussion,  we  see  that  while  progressive  taxation 
is  to  a  certain  extent  defensible  as  an  ideal,  and  as  the  expression 
of  the  theoretical  demand  for  the  shaping  of  taxes  to  the  test 
of  individual  faculty,  it  is  a  matter  of  considerable  difficulty  to 
decide  how  far  or  in  what  manner  the  principle  ought  to  be 
actually  carried  out  in  practice."  ^ 

The  theory  of  marginal  utility,  which  holds  that  each  unit 
of  a  large  supply  or  stock  of  goods  available  gives  less  satis- 

'  Progressive    Taxation,  2d  cd.,  p.  302  fl. 


q8  introduction  to  public  finance 

faction  than  each  unit  in  a  small  one,  gives  us  no  measure  of 
how  much  less  the  satisfaction  is.  It  does,  however,  teach 
that,  in  general,  after  the  somewhat  uncertain  point  of  satiety 
is  passed,  each  added  unit  in  the  surplus  has  no  more  utility 
than  any  other  unit  in  the  surplus.  This  gives  us  a  scientific 
explanation  of  the  common  practice,  adopted  under  the  dic- 
tates of  common  sense,  of  stopping  progression  and  reverting 
to  proportion  after  some  assumed  high  level  is  reached. 

If  we  are  under  necessity  of  saying  where,  in  a  given  income 
tax,  for  example,  progression  shall  stop  and  proportion  set  in, 
we  are  forced  to  decide  by  considerations  quite  outside  of  the 
field  of  pain  inflicted  and  of  strength  available.  The  real  deci- 
sion will  have  to  be  made  on  the  basis  of  general  social  welfare. 
A  tax  at  rates  so  very  progressive  as  to  approach  confiscation 
quite  rapidly,  may  be  justified  as  a  war  tax,  but  if  we  desire  to 
stimulate  industry  and  promote  thrift  it  is  essential,  lest  the 
accumulation  of  capital  cease,  to  avoid  any  approach  to  con- 
fiscation. War  income  taxes  with  maximum  rates  above  fifty 
per  cent  for  large  incomes  are  not  uncommon,  but  in  peace 
times  a  rate  over  ten  per  cent  is  held  to  be  dangerously  high. 
Practical  administrators  of  the  tax  laws  regard  twenty-five  per 
cent  as  the  highest  advisable  rate  for  the  inheritance  tax,  and 
while  it  would  be  hard  if  not  impossible  to  state  the  grounds 
for  this  conclusion,  the  unanimity  shown  argues  that  it  would 
be  wise  to  be  guided  by  it. 

It  would  seem,  then,  that,  in  general,  faculty  is  the  ideal  base  of 
taxation ;  that  faculty  can  be  measured  either  by  property  or  by 
income,  but  best  by  the  latter ;  that  faculty  increases  somewhat 
progressively  and  is  affected  by  the  consideration  of  relative 
conditions,  as  the  kind  of  property,  the  source  of  the  income, 
or  the  burdens  already  resting  upon  the  individual  or  property. 
All  these  considerations  have  to  be  applied  in  determining 
whether  the  tax  system  of  any  country  compHes  with  the  rules 
of  justice.  They  do  not  apply  with  the  same  strictness  to  the 
separate  taxes. ^ 

1  The  recognition  of  the  principle  of  progression  in  the  recent  reforms  of  taxation 
is  very  marked.     See  Seiigman,  Essays,  305  £E. 


CHAPTER  IV 

THE  DEVELOPMENT   OF  TAXATION   BEFORE  THE 
INDUSTRIAL  REVOLUTION 

Section  i.  Taxes  Not  Found  under  Feudalism.  —  Feu- 
dalism placed  a  large  number  of  economic  receipts  directly  in 
the  hands  of  the  rulers.  These  receipts  were  generally  suffi- 
cient for  the  discharge  of  the  customary  public  activities.  It 
is  a  mistake,  therefore,  to  search  for  taxes  proper  in  the  period 
of  the  supremacy  of  feudalism ;  that  is,  from  the  capitulary  of 
Charles  the  Bald,  877,  to  the  end  of  the  thirteenth  century. 
Taxes  begin  to  emerge  with  the  transformation  of  feudal  rights 
and  dues,  the  commutation  of  obligatory  military  services,  and 
the  Hke  into  payments  in  kind  or  in  money.  Greek  and  Roman 
forms  of  taxation  had  even  less  influence  on  modern  systems 
of  taxation  than  Greek  and  Roman  forms  of  expenditure  on 
modern  spending.  For  the  study  of  Roman  law  and  the  tradi- 
tions of  the  glory  of  the  Roman  Empire  determined  many 
State  activities  that  involved  the  spending  of  public  wealth. 
But  new  methods  of  obtaining  the  funds  were  devised.  Infor- 
mation concerning  the  taxes  of  the  period  from  the  fall  of  Rome 
to  the  capitulary  of  Charles  the  Bald  is  rather  meagre  and  too 
vague  to  be  of  much  value. 

Early  Taxes.  —  The  first  taxes  to  emerge  from  the  darkness 
of  this  period  are  a  number  of  fee-like  contributions  of  the 
nature  of  commuted  feudal  services,  or  directly  connected  with 
feudal  rights,  certain  market  dues  and  customs  duties,  tolls 
for  protection  to  travellers,  for  the  use  of  roads,  bridges,  and 
ferries,  and  two  forms  of  property  taxes,  land  taxes  and  family 
taxes.  The  land  taxes  of  this  period  are  just  emerging  from  the 
character  of  rent  payments  and  acquire  only  by  degrees  the  char- 

99 


lOO  INTRODUCTION  TO  PUBLIC   FINANCE 

acteristics  of  pure  taxes.  Even  in  the  case  of  land  left  to  the 
original  possessors  after  conquest,  the  payments  demanded  are 
more  of  the  character  of  rents  than  of  taxes.  But  the  combina- 
tion of  these  charges  with  hearth  or  family  taxes  leads  to  the 
formation  of  various  mixed  property  and  personal  taxes.  The 
fact  that  land  is  practically  the  only  kind  of  revenue-yielding 
property  and  that  no  considerable  earnings  are  made  without 
the  use  of  land,  makes  this  tax  sufficiently  universal  for  the  de- 
mands of  justice. 

Direct  taxes  are  in  this  period,  as  in  classical  times,  never 
paid  by  the  freeman.  They  are  regarded  as  derogatory  and  as 
the  badge  of  a  servile  position.  The  freeman  could  give  his 
services  to  the  State,  he  could  risk  his  hfe  for  it,  but  he  would 
regard  it  as  a  deadly  insult  if  he  were  asked  to  pay  taxes.  In- 
directly, of  course,  he  was  taxed,  as,  for  example,  when  he 
bought  merchandise,  for  permission  to  sell  which  the  trader 
was  taxed. 

As  soon,  however,  as  industry  began  to  develop,  as  soon  as 
the  crafts  sprang  up  in  the  cities  which  clustered  around  the 
market-places,  and  classes  which  had  lived  in  part  from  indus- 
trial pursuits  found  it  possible  to  obtain  so  wide  a  market  that 
they  could  live  entirely  from  their  industry,  then,  there  arose 
such  a  differentiation  of  the  sources  of  wealth  that  the  old 
forms  of  taxation  were  insufficient.  Taxation  had,  therefore, 
to  be  extended  to  meet  the  new  forms  of  wealth.  The  first 
methods  of  taxing  these  were  dictated  solely  by  expediency 
and  the  desire  of  obtaining  as  large  revenues  as  possible,  rather 
than  by  any  definite  ideas  of  justice,  and  were  mainly  indirect 
in  character  and  partly  an  extension  of  the  older  market  dues, 
excises,  customs,  and  tolls,  together  with  new  taxes  of  the  same 
kind. 

Of  old  Roman  taxes  none  can  be  strictly  said  to  have  sur- 
vived the  conquest.  Some  lasted  throughout  the  Merovingian 
period  in  a  greatly  changed  form.  Finally  they  were  merged 
into  various  feudal  payments,  and  took  on  the  nature  of  rents. 
A  few  relatively  insignificant  market  dues  and  fees  constitute 
the  only  taxes  which  regularly  formed  a  part  of  the  revenues 


TAXATION   BEFORE  THE  INDUSTRIAL   REVOLUTION      lOI 

of  the  State  or  of  the  State's  officers,  the  feudal  lords.  The 
regular  feudal  burdens,  while  economic  in  character  and  not 
fiscal,  really  fill  the  place  of  the  later  direct  taxes.  In  propor- 
tion to  the  prosperity  of  the  people  they  were  certainly  as  heavy 
as  any  modern  systems  of  taxes.  The  rapid  disintegration  of 
the  German  Empire  into  smaller  territorial  lordships  after  the 
sixteenth  and  seventeenth  centuries  rendered  the  question  of 
imperial  taxation  at  once  less  pressing  and  more  compHcated. 
On  some  eleven  different  occasions,  according  to  Wagner,  be- 
tween 1427  and  1550,  the  Empire,  as  such,  stood  in  need  of 
extra  revenues,  for  purposes  so  clearly  of  common  benefit  as  to 
justify  a  demand  for  common  contributions.  Such  an  instance 
is  that  of  the  Hussite  and  Turkish  wars.  The  tax  used  was 
the  "  common  penny."  This  direct  imperial  tax  was  a  mixture 
of  poll  and  personal  taxes  with  income  and  property  taxes. 
We  find  very  similar  taxes  in  France  and  England.  It  fell  upon 
all  imperial  subjects  whether  holding  from  the  crown  or  not, 
provided  they  held  property.  The  rate  was  an  irregular  regres- 
sive one,  being  smaller  for  all  above  a  certain  amount  of  prop- 
erty. It  was  very  badly  administered  and  not  universally 
collected.' 

In  the  German  principaHties  that  were  formed  out  of  the  Ger- 
man Empire  the  first  direct  taxes  were  the  bedes.  These  were 
extra  payments,  similar  in  form  to  the  existing  feudal  contri- 
butions. They  were  made  by  those  already  paying  such  dues 
and  were  measured  in  somewhat  similar  ways.  The  basis  was 
generally  landed  property.  The  first  bedes  were  more  or  less 
voluntary,  private  contributions  for  the  support  of  the  Vogt, 
count,  or  lord  for  some  recognised  public  purpose.  By  con- 
tracts entered  into  between  the  contributors  and  the  lords, 
they  became  compulsory  and  formed  part  of  the  regular  income 
of  the  lords,  who  then  in  extraordinary  cases  of  need  would  again 
come  forward  with  the  demand  for  extra  or  "  necessity  "  bedes. 
This  was  frequently  done  in  times  of  war.  Hence,  these  bedes 
were  often  called  "  army  bedes."  Some  of  these  in  turn  became 
customary  or  fixed.     With  the  rise  of  the  idea  of  public  life  and 

'  Cf.  Wagner,  Schonberg's  Handbuck,  3d  ed.,  Ill,  184. 


I02  INTRODUCTION   TO   PUBLIC   FINANCE 

public  needs,  the  bedes  easily  became  compulsory  public  con- 
tributions, and  were  regarded  as  distinct  from  the  feudal  dues, 
which  by  virtue  of  longer  standing  and  the  absence  of  a  recog- 
nised public  purpose  were  treated  as  the  private  revenues  of 
the  prince.  A  pecuharity  of  the  earlier  assessments  of  the  hedes 
was  the  method  of  apportionment  to,  or  assumption  by,  the 
different  orders  or  cities  of  a  certain  lump  sum,  which  was  then 
distributed  by  their  own  rulers  among  the  different  members, 
according  to  some  measure  agreed  upon.  Prelates,  clergy,  and 
knights  were  exempt  from  the  ordinary  hedes.  They  sometimes 
rendered  similar  contributions,  hedging  themselves  in  with  all 
sorts  of  reserves  and  precautions,  to  prevent  the  payments 
becoming  regular.     These  were  called  "  donative  monies." 

It  was  in  the  cities  that  retained  a  large  degree  of  pohtical 
independence  that  the  highest  development  of  the  fiscal  system 
was  to  be  found  in  the  middle  ages.  This  is  owing  to  the  fact 
that  they  were  in  advance  of  the  rest  of  the  country  in  their 
economic  development.  Long  before  the  principalities  were 
able  to  abandon  payments  in  kind  and  services,  the  cities  were 
collecting  taxes  in  money,  making  some  use  of  public  credit 
and  developing  regular  fiscal  offices.  "  The  art  of  taxation," 
says  Wagner,^  "  the  use  of  public  credit,  and  the  practical 
organisation  of  the  financial  administration  in  the  cities  had 
been  an  important  part  of  public  institutions  for  centuries  be- 
fore the  territorial  State  had  even  recognised  the  need  of  such." 
This  field  has,  however,  not  yet  received  the  attention  of  his- 
torical investigators  sufficiently  to  allow  us  to  draw  conclusions 
as  to  the  generally  prevailing  forms.- 

Sec.  2.  Early  French  Taxes.  —  In  France  the  early  growth  of 
a  strong  central  power  led  to  an  intensification  and  sharp  dif- 
ferentiation of  the  royal  feudal  dues  from  the  other  feudal 
charges,  which  gives  them  something  the  character  of  taxes.  But 
inasmuch  as  the  French  State  was  peculiarly  a  proprietary  State, 
and  the  territory  was  rather  a  part  of  the  private  property  of  the 
king  than  public  property  in  the  modern  sense,  these  early  charges 

'  Schonberg's  Handbuch,  3d  ed.,  Ill,  185. 

*  See  Schonberg's  Investigations  into  the  City  of  Basel. 


TAXATION  BEFORE  THE  INDUSTRIAL  REVOLUTION     103 

are  not  taxes  proper,  but  rents,  or,  to  use  the  more  general  term, 
feudal  dues.  But  the  rapid  growth  of  the  central  power,  and 
the  high  development  of  public  needs  in  the  kingdom,  neces- 
sitated more  revenues.  These  needs  were  at  first  met  by  the 
collection  of  indirect  consumption  and  trade  taxes.  The  ten- 
dency toward  the  development  of  indirect  taxes  grew  apace 
after  the  seventeenth  century.  The  mercantile  theory,  which 
was  supreme  for  most  of  the  time  after  Colbert,  prompted  a 
high  development  of  custom  duties,  and  these  ran  parallel  with 
internal  consumption  taxes.  In  the  eighteenth  century  there 
were  three,  or  possibly  four,  important  taxes  which  had  grown 
up  in  various  ways  out  of  the  feudal  dues.  These  were  the 
"  taille  "  ^  (tallage),  the  "  vingtlemes  "  (twentieths),  the  "  capi- 
tation "  (poll),  and  possibly  the  "  dtnies  "  (tithes).^ 

The  taille  is  of  feudal  origin.  Originally  it  was  arbitrarily 
assessed  with  extreme  rigour  upon  the  serfs  by  the  lords,  and 
occasionally  upon  the  great  vassals  by  the  king  with  the  assent 
of  the  peers.  It  became  a  permanent  charge  when  royal  power 
was  firmly  estabhshed  on  the  ruins  of  feudalism.  Charles  VIII 
made  it  permanent  at  the  same  time  with  the  establishment  of 
the  royal  army.  The  taille  was  both  real  and  personal.  On 
the  one  side  it  was  based  on  the  revenue  from  landed  property ; 
on  the  other,  it  was  based  on  the  faculty  of  the  taxpayer,  meas- 
ured by  the  revenues  from  his  landed  property,  and  active 
rents,  as  well  as  the  products  of  his  own  industry.  This  tax, 
suppressed  in  1790,  yielded  44,737,800  livres  the  year  before. 
Necker  obtained  91,000,000  livres  from  it.  Nobles  and  clergy 
were  exempt. 

The  vingtiemes  consisted  of  one  or  more  twentieth  parts  of 

>  The  term  "taille''  in  English,  tallage,  also  spelled  talliage,  tailaf,c,  and  taillage,  is 
from  a  root  meaning  "to  cut."  It  is  explained  as  derived  from  the  general  method 
of  keeping  accounts  by  means  of  notched  sticks.  A  taille  was  any  sum  of  which 
account  was  kept,  then  the  amount  scored  up  (tallied)  against  any  person.  Slender 
sticks  with  notches  called  "tally-sticks"  were  used  by  the  English  exchequer  for 
accounts,  until  abolished  by  the  statute  of  23  Geo.  Ill,  c.  82.  Similarly,  the  Ger- 
man Kerbe,  tally  sticks.  Other  roots  meaning  "to  cut"  are  common  in  the  names 
of  various  taxes ;  viz.  incisio,  incisura,  else,  later  accise,  adcisio,  Eng.  excise ;  in 
these  Latin  roots  the  thought  is,  that  a  part  of  the  taxed  article  is  cut  out  for  the 
government. 

*  See  Vignes,  Ed.,  Traid  des  Impdts  en  France,  1872,  p.  10. 


I04  INTRODUCTION  TO  PUBLIC  FINANCE 

the  revenues  from  either  landed  or  movable  property.  This 
tax  had  a  varied  history.  At  first  it  was  used  with  the  taille, 
but  when  that  tax  was  made  permanent  under  Charles  VIII, 
the  vingtieme  disappeared.  It  was  revived  in  1710  by  Louis 
XIV  as  a  war  tax.  It  remained  as  the  occasional  resource  of 
the  treasury  up  to  the  Revolution.  Only  the  clergy  were 
exempt.  It  produced  46,000,000  livres  (under  Necker,  55,- 
000,000). 

The  capitation,  or  system  of  poll  taxes,  was  the  variable  tax 
of  the  ancient  monarchy.  It  dates  from  1695.  It  was  first 
regarded  as  a  temporary  expedient,  but  was  continued  to  the 
Revolution.  It  was  assessed  according  to  a  tariff  of  twenty- 
two  classes.  But  the  base  was  frequently  changed.  The 
clergy  were  exempt,  the  nobles  were  taxed  on  the  basis  of  their 
presumptive  ability,  and  those  who  paid  the  taille  were  taxed 
according  to  the  amount  of  that  tax  they  paid.  In  1786  it 
yielded  41,500,000  livres.^ 

The  dtme,  or  tithe,  was  an  assessment  paid  in  kind  from  the 
fruits  of  the  soil  for  the  benefit  of  the  clergy.  The  tax  was  not 
always  the  tenth,  but  varied  from  one-seventh  to  one  thirty- 
second.  The  ecclesiastical  purpose  of  this  payment  has  led 
some  to  refuse  to  call  it  a  tax  in  the  strict  sense.  Since  the 
Church  exercised  a  power  that  differed  little  from  that  of  the 
State  and  the  burden  was  a  regular  one  maintained  for  a  public 
purpose,  it  should  probably  be  called  a  tax. 

The  corvees  were  more  strictly  taxes  than  the  dimes.  These 
were  personal  services  applied  to  the  construction  of  the  roads 
and  other  public  works.  They  were  regarded  as  feudal  dues. 
They  were  of  two  kinds :  the  first  were  levied  on  property  and 
rendered  by  the  proprietor  for  his  lands,  and  the  second  were 
levied  on  persons  and  rendered  by  all,  irrespective  of  land- 
holding.  The  nobles  and  the  aliens  were  not  subject  to  the 
personal  corvees.  The  clergy  could  commute  them  into  money 
payments  or  have  them  rendered  at  their  own  cost.  The  land 
corvees  were  due  from  all  hereditary  proprietors  irrespective  of 
rank,  but  they  were  not  bound  to  furnish  them  in  person.     Louis 

'For  further  details  see  Farieu,  Traitc  des  Impols,  1,  p.  144  fi. 


TAXATION  BEFORE  THE  INDUSTRIAL  REVOLUTION      105 

XVI  suppressed  the  corvees  in  1776,  but  they  were  reestablished. 
They  disappeared  in  1793. 

The  most  important  indirect  consumption  taxes  were  leased 
for  166,000,000  livres,  and  those  collected  by  the  government 
were  51,500,000  livres.  These  together  nearly  equalled  the 
revenue  from  direct  taxes.  The  indirect  taxes  of  the  ancient 
monarchy  were :  first,  the  aides,  which  consisted  of  taxes  on 
drinks,  on  articles  of  gold  and  silver,  on  iron,  oil,  skins,  starch, 
bills,  paper,  etc.,  and  the  octrois,  levied  at  the  city  gates  on  all 
sorts  of  goods  when  brought  into  the  towns ;  second,  the  gahelle, 
or  salt  tax,  which  was  so  arranged  as  to  amount  practically  to  a 
direct  tax.  For  the  people  were  obliged  to  buy  each  year  from 
the  management  of  the  monopoly  an  amount  of  salt  deter- 
mined in  each  case  by  the  size  of  the  family.  There  was  a 
similar  "  salt  conscription  "  in  Germany.  Thirdly,  there  was 
the  tax  on  tobacco. 

Sec.  3.  Early  English  Taxes.  —  In  England  ^  we  find  in 
Anglo-Saxon  times  three  principal  taxes :  (i)  The  ship-geld,  or 
ship  money,  a  tax  imposed  on  those  shires  and  towns  along  the 
sea-coast  which  were  unable  at  time  of  need  to  furnish  ships 
for  defence,  when  invasion  was  threatened.  It  was  levied 
intermittently  and  was  used  exclusively  for  naval  purposes. 
The  attempt  of  Charles  I,  in  1637,  to  impose  this  tax  on  all  of 
England  and  for  purposes  other  than  the  na\y,  was  one  of  the 
contributing  causes  of  the  civil  war.  (2)  The  tribute-like 
"  Danegeld  "  was  levied  after  991  at  so  much  a  hide  (piece  of 
land)  and  paid  to  the  Danes  to  prevent  them  from  raiding  the 
coasts.  After  the  cessation  of  the  original  cause,  it  was  col- 
lected by  the  kings  as  private  revenue.  (3)  The  "  fumage," 
or  "  tax  of  smoke  farthings,"  was  a  tax  on  every  hearth.  This 
seems  to  have  been  a  traditional  form  of  tax  with  the  Saxons. 
It  was  in  effect  a  family  tax,  as  the  hearth  stood  for  the 
family. 

In  Norman  times,  the  feudal  character  of  the  government 
was  such  that  it  obtained  revenues  from  the  demesne,  from 
feudal  dues,  and  from  the  royal  prerogatives  so  great  that  no 

'  See  Dowell,  Tlislory  of  Taxation  and  Taxes  in  England. 


lo6  INTRODUCTION  TO  PUBLIC  FINANCE 

real  taxes  exist.  The  Danegeld  was  levied  by  the  Conqueror 
as  an  annual  tax,  but  disappeared  after  1163. 

With  the  reign  of  Henry  II  came  a  more  ordered  and  regular 
system  of  taxation.  This  began  with  the  well-known  com- 
mutation of  the  military  obHgations  of  tenants.  It  was  due 
to  the  continental  position  of  the  Angevin  kings.  The  dis- 
tance at  which  war  was  waged  and  the  length  of  service  de- 
manded rendered  the  military  obligations  particularly  burden- 
some, and  tenants  were  anxious  to  commute  them.  An  army 
of  mercenaries,  too,  suited  the  king  better,  as  easier  to  control 
than  the  feudal  army.  Hence  arose  the  commutation  of  the 
duty  to  foreign  service  into  a  money  payment  of  two  marks, 
£1  65.  8d.,  on  each  fee  of  £20,  known  as  the  "  scutage,"  or 
shield-money.  Henry  II  collected  three  such  scutages,  and 
this  tax  did  not  fall  into  disuse  until  after  1322.  It  was 
practically  a  land  tax,  levied  each  time  for  a  special  pur- 
pose. 

The  "  tallage  "  in  England  was  the  tax  that  was  collected 
from  the  tenants  on  the  royal  demesne  on  occasions  of  unusual 
expense.  Those  who  paid  the  hidage  or  Danegeld  were  gen- 
erally exempt.  Cities  and  towns  not  exempt  in  this  way  paid  the 
auxilium  or  aid.  The  tenants  were  liable  for  these  taxes  up 
to  one-tenth  of  their  goods.  In  the  city  of  London  the  tallage 
was  treated  as  a  "  benevolence."  It  was  superseded  after 
Edward  III  by  the  general  taxes  on  movables. 

The  taxes  on  movables  began  with  the  "  Saladin  tithe  "  in 
1 188.'  It  was  one-tenth  of  rent  and  movables  paid  by  all 
except  crusaders.  Out  of  this  insignificant  beginning  grew  a 
system  of  taxes  on  movables  which  finally  included  all  the  taxes 
so  far  mentioned.  Richard  I  levied  a  tax  on  all  ploughed  land 
in  1 194,  known  as  the  "  carucage,"  from  the  area  upon  which 
it  was  levied ;  namely,  the  amount  of  land  that  could  be  covered 

1  The  tithe,  or  tenth,  as  the  rate  of  taxation  appears  in  many  taxes  in  Christian 
countries.  It  is  especially  common  in  Catholic  countries.  The  idea  of  taking  a 
tenth  has  its  origin  in  Mosaic  law :  "And  concerning  the  tithe  of  the  herd,  or  of  the 
flock,  even  of  whatsoever  passeth  under  the  rod,  the  tenth  shaO  be  holy  unto  the 
Lord."  Lev.  28 :  32.  A  half  a  tithe  and  other  convenient  fractions  give  rise  to  the 
rates,  which  otherwise  appear  irregular. 


TAXATION   BEFORE  THE   INDUSTRIAL  REVOLUTION      107 

by  one  plough  (caruca)  in  a  season.  After  1224,  this  was 
merged  in  the  tax  on  movables. 

The  tax  on  rents  and  movables,  which  began,  as  just  stated, 
with  the  Saladin  tithe,  was  continued  from  ii8g  to  1334.  This 
was  a  grant  of  one-thirteenth  in  1207,  one-fifteenth  in  1225, 
one-fortieth  in  1232,  one- thirtieth  in  1237,  one-fifteenth  in  1275. 
Up  to  1283,  the  method  of  obtaining  the  grant  was  by  separate 
negotiations  with  each  section  of  the  country.  But  after  that 
date,  general  grants  were  made  by  Parhament  and  other  taxes 
were  discontinued. 

Besides  these  direct  taxes,  the  crown  had  the  privilege  of 
taking  "  customary  "  tolls  upon  merchandise  imported  or  ex- 
ported. Hence  our  modern  term,  "  customs  duties."  These 
tolls  were  of  the  character  of  licenses  and  protection  money. 
Their  early  history  is  obscure.  Before  the  Magna  Charta  they 
had  become  so  fixed  and  regular  as  to  call  forth  the  well-known 
clause  of  that  historical  document :  ''  Let  all  merchants  have 
safety  and  security  to  go  out  of  England,  to  come  into  England, 
and  to  remain  in  and  go  about  through  England,  as  well  by 
land  as  by  water,  for  the  purpose  of  buying  and  selhng,  without 
the  payment  of  any  evil  or  unjust  tolls,  on  the  payment  of  the 
ancient  and  just  customs  "  (sine  omnibus  malis  toltis,  per  anti- 
quas  et  rectas  consuetudines).  In  1275  these  "  ancient  cus- 
toms," slightly  raised,  were  granted  Edward  I  by  Parliament. 
The  chief  duties  were  on  wine  imported  and  wool  exported  and 
a  poundage  on  all  other  goods  imported  or  exported. 

From  1334  to  1453  there  are  a  number  of  changes  to  note. 
The  fifteenths  and  tenths  were  apportioned  among  the  com- 
munities, cities,  and  boroughs,  the  townships  and  the  demesne 
tenants,  in  1334,  and  the  assessment  then  made  remained  the 
basis  of  taxation.  The  tax  thus  became  a  fixed  charge.  It 
varied  in  rate  from  one-half  a  ^^  fifteenth  "  and  "  tenth"  to  two- 
fifteenths  and  tenths,  as  the  need  for  revenues  changed.  Some- 
times no  such  grant  was  made.  In  1377  Parliament  granted 
to  the  king  a  tax  of  "  four  pence,  to  be  taken  from  the  goods  of 
each  person  in  the  kingdom,  men  and  women,  over  the  age  of 
fourteen  years,  except  only  real  beggars."     This  was  known  as 


I08  INTRODUCTION  TO  PUBLIC   FINANCE 

the  "  tallage  of  groats."  Subsequently  a  classified  poll  tax  was 
employed,  in  which  an  attempt  was  made,  by  the  arrangement 
of  the  payers  into  classes  and  a  gradation  of  the  rates,  to  get  a 
larger  return  by  taking  advantage  of  the  greater  wealth  of 
certain  classes.  The  rates  were :  for  the  Duke  of  Lancaster, 
who  was  the  highest  subject,  £6  13^.  4J. ;  earls  £4,  barons  £2, 
and  so  on  down  to  the  lowest ;  every  one,  except  beggars,  was 
to  pay  at  least  a  groat  or  4c?.  In  1379  this  yielded  £25,000, 
which  was  only  slightly  more  than  the  previous  tallage  of 
groats.  The  clergy  were  included  in  both  these  taxes.  After 
the  peasant  revolt,  which  was  occasioned  partly  by  the  op- 
pressive methods  used  in  collecting  these  taxes,  return  was 
made  to  the  fifteenths  and  tenths.  From  1382  the  landowners 
take  the  whole  burden  of  the  old  "  fifteenth  and  tenth."  In 
1435  t^^^  was  supplemented  by  a  graduated  tax  on  income 
from  lands,  rents,  and  annuities,  and  ofiices  of  freehold.  In 
the  reign  of  Edward  III  the  customs  yielded  large  returns. 
They  consisted  as  before  of  tunnage  on  wine,  customs  on  wool 
and  leather,  and  poundage  on  all  other  merchandise.  The 
popularity  of  Edward  IV  enabled  him  to  add  to  his  other 
sources  of  revenue  the  "  benevolences,''  demands  on  the  rich  for 
special  contributions.  These  "  benevolences  "  were  not  always 
cheerfully  paid.  It  was  more  often  "  as  though,"  says  More, 
"  the  name  of  benevolence  had  signified  that  every  man  should 
pay  not  what  he  himself  of  his  good  will  list  to  grant,  but  what 
the  King  of  his  good  will  list  to  take."  Throughout  the  history 
of  taxation  in  England  the  grant  of  monopolies  of  new  indus- 
tries was  made  a  source  of  income  to  the  government.  The 
multiplication  of  these  under  Elizabeth  did  not  yield  much 
revenue,  although  it  gave  rise  to  much  discontent. 

There  is  little  in  the  varied  application  of  these  taxes  that  is 
important  as  showing  the  line  of  development  until  the  seven- 
teenth century.  At  that  time  they  proved  unequal  to  the  task 
of  meeting  the  growing  needs  of  the  treasury.  The  chief  aux- 
ihary  lay  in  the  extension  of  the  indirect  consumption  taxes. 
The  year  1692  (revision,  1697)  saw  the  establishment  of  a 
permanent  land  tax.     This  grew  out  of  the  apportionment  of 


TAXATION  BEFORE   THE   INDUSTRIAL   REVOLUTION      109 

the  "  fifteenths  and  tenths."  It  became  a  fixed  charge  on 
land,  a  real  burden,  not  having,  as  time  went  on,  any  definite 
relation  to  the  income  from  land.  In  1798  Pitt  made  this 
redeemable  by  the  payment  of  a  lump  sum  down,  after  which 
no  annual  tax  would  be  collected.  This  privilege  has  been 
taken  advantage  of  to  the  extent  of  removing  half  the  charge 
from  the  lands.  In  its  operation  the  land  tax  became  rather 
a  rent  than  a  tax. 

The  Income  Tax.  —  The  wars  of  the  period  of  the  French 
Revolution  and  the  consequent  need  of  revenue  introduced  the 
general  income  tax  (1798,  1802,  1803,  1806).  This  tax  was  no 
departure  in  principle  from  the  older  taxes,  although  a  departure 
in  method.  It  has  been  well  characterised  as  a  combination  of 
several  taxes  into  a  system  which  has  for  its  aim  the  proportional 
taxation  of  all  incomes,  with  the  exemption  of  a  certain  fixed 
simi  (degressive).  The  form  which  it  took  in  1803  is  the  best 
to  study.  Two  separate  acts  were  passed,  the  one  taxing  all 
incomes  from  holdings  of  real  estate,  rents,  and  public  salaries 
at  the  source ;  that  is,  so  far  as  possible  the  tax  was  deducted 
before  the  revenues  passed  into  the  hands  of  the  recipient. 
The  second  taxed  industrial  earnings  and  interest  on  capital  on 
the  basis  of  a  declaration  by  the  taxpayer.  The  tax  began 
with  an  income  of  £60  (later  £50),  and  this  amount  could  be 
deducted  from  all  incomes  below  £150;  after  that  the  full  rate 
was  paid.  Each  person  was  required  to  declare  his  whole  in- 
come and  could  claim  reimbursement  for  any  tax  stopped  at 
the  source  if  he  could  show  that  his  total  income  was  below  the 
minimum.  This  tax,  set  aside  in  1816,  was  restored  in  1842, 
as  a  substitute  for  the  indirect  taxes,  removed  in  consequence 
of  the  demand  for  commercial  freedom.  The  rate  is  changed 
from  time  to  time  as  the  needs  of  the  government  change. 

Sec.  4.  The  English  Local  Rates.  —  Local  taxation  in  Eng- 
land has  been  partly  independent  of  royal  taxation.  England 
has  not  followed  the  continental  plan  of  collecting  revenues  for 
local  purposes  in  the  form  of  additions  to  the  national  taxes. 
While  the  weight  of  national  taxation  fell  upon  customs  duties, 
excises,  and  certain  direct  taxes,  measured  roughly  by  income, 


no  INTRODUCTION  TO   PUBLIC   FINANCE 

local  taxation  was  based  exclusively  upon  revenues  from  real 
estate.  The  prototype  of  all  local  taxation  was  the  poor  rate. 
Previous  to  the  reign  of  Elizabeth  local  activities  were  of  such  a 
character  that  they  could  be  discharged  from  feudal  dues.  In 
the  manorial  villages  and  the  boroughs  with  semi-feudal  guild, 
and  close  corporation  governments,  which  owned  landed  prop- 
erty, feudal  incomes  paid  the  few  public  expenses.  But  the 
removal  of  the  monasteries,  hospitals,  and  other  charitable 
foundations,  threw  upon  public  charity  a  number  of  well-devel- 
oped paupers ;  and  the  rapidly  changing  character  of  industry 
and  of  economic  life  constantly  gave  rise  to  the  problem  of  what 
to  do  with  the  unemployed,  who  at  times  became  very  numerous." 
The  result  was  the  famous  poor  law  of  1601.  The  principle  of 
the  tax  for  the  support  of  the  poor  had  been  of  slow  growth. 
In  the  reign  of  Henry  VIII  the  giving  of  alms  was  prohibited, 
and  collections  for  the  impotent  poor  of  the  parish  were  re- 
quired to  be  made  in  each  church.  In  1547  the  Bishops  were 
authorised  to  prosecute  all  persons  who  refused  to  contribute 
for  this  purpose,  or  should  dissuade  others  from  contributing. 
In  the  fifth  year  of  Elizabeth  the  justices  of  peace  were  made 
judges  of  what  constituted  a  reasonable  contribution  for  this 
purpose.  After  1572  regular  compulsory  contributions  were 
levied.  Out  of  a  purely  voluntary  contribution,  then,  there 
emerged  in  two-thirds  of  a  century  a  compulsory  tax.  The 
basis  of  this  tax  was  the  annual  rental  value  of  real  property. 
The  tax  was  collected  not  from  the  owner  but  from  the  occupier. 
Most  of  the  other  taxes  for  local  purposes  which  have  developed 
in  England  since  then  are  of  the  same  general  character.  They 
are  too  numerous  to  mention  here.  Besides  the  direct  taxes, 
there  were  a  few  indirect  ones,  market  dues,  road  tolls,  coal  and 
wine  duties. 

Sec.  5.  Early  American  Taxes.  — ■  In  the  American  colonies 
we  meet  with  entirely  new  conditions.  Public  needs  were 
simple  and  few,  and  were  mostly  local  in  character.  Customs 
duties  were  for  the  most  part  controlled  by  the  mother  country 
in  the  interests  of  her  gener^  colonial  policy.  So  the  colonists 
were  driven  to  other  forms  of  taxation.     Practically  free  trade 


TAXATION  BEFORE  THE  INDUSTRIAL   REVOLUTION      ill 

in  land  existed.  Land  at  a  known  selling  value  early  formed 
a  large  part  of  the  property  of  each  citizen,  and  differed  in  no 
essential  particular  from  his  other  property.  There  were  in 
some  colonies,  to  be  sure,  charges  of  a  feudal  nature  known  as 
quit  rents,  which  were  a  recognition  of  the  king's  interest  in 
the  land.  These  never  became  of  fiscal  importance,  and  never 
developed  into  taxes.  Nor  do  they  seem  to  have  ever  seriously 
modified  the  essentially  free  character  of  landowning,  since 
they  were  so  irregularly  and  meagrely  collected.  They  were 
"  acknowledgments  His  Majesty  receives  of  the  People's  Tenure 
and  Subjection."  ^  At  times  they  developed  into  an  apparent 
tax  on  certain  lands.  They  seldom  formed  a  part  of  the  rev- 
enues of  the  colonial  treasuries,  being  generally  payable  to  the 
king.2 

Just  as  there  were  three  different  forms  of  government  among 
the  colonies,  so  there  were  in  the  beginning  three  different  ten- 
dencies in  taxation.''  New  England  began  with  a  tax  on  prop- 
erty and  faculty.  The  General  Court  of  Massachusetts  laid 
down  in  1634  the  following  principle:  "  In  all  rates  and  public 
charges  the  towns  shall  have  respect  to  levy  every  man  accord- 
ing to  his  estate,  and  with  consideration  all  other  his  abilities 
whatsoever,  and  not  according  to  the  number  of  his  persons."* 
Later,  however,  poll  taxes  were  used,  and  the  general  property 
tax  was  extended  to  cover  property  in  the  process  of  acquisition, 
or  the  earnings  of  labour.  In  all  the  New  England  colonies 
the  resulting  system  was  practically  as  follows:  Each  person 
was  to  contribute  as  he  was  able.  Ability  was  measured,  first, 
by  property,  real  and  personal ;  secondly,  by  the  person  himself; 
thirdly,  in  the  case  of  wage-earners,  merchants,  and  others,  by 
earnings.  With  a  few  notable  exceptions,  as  in  the  case  of  law- 
yers, the  third  measure  of  ability  gradually  fell  into  disuse. 
It  has  been  repeatedly  pointed  out  ^  that  the  New  England 

•  Spottiswood  Letters,  quoted  by  Ripley,  Financial  History  of  Virginia. 

2  See  Wood,  History  of  Taxation  in  Vermont,  p.  13.  Also  Schwab,  History  of  the 
New  York  Property  Tax. 

^  Cf.  SeliKman,  Essays,  p.  19  ff. 

*  Massachusetts  Records,  quoted  liy  Douglas,  Financial  History  of  Massachusetts, 
p.  18. 

<-  Walker,  "The  Bases  of  Taxation,"  Political  Science  Quarterly,  Vol.  ITT. 


112  INTRODUCTION  TO  PUBLIC   FINANCE 

people  had  the  habit  of  saving.  All  earnings  were  soon  turned 
into  property.  So  that  the  demands  of  justice  were  fully  met 
by  the  general  property  tax  and  the  poll  tax.  In  addition  to 
these  direct  taxes,  there  were  a  number  of  indirect  taxes,  "  im- 
posts," some  collected  in  the  form  of  licenses,  and  many  as 
excises. 

In  the  Southern  colonies,  of  which  Virginia  will  serve  as  a 
model,  the  first  taxes  were  the  poll  taxes.  "  Personal  respon- 
sibility," says  Ripley,  "  was  thus  the  basis  of  taxation  at  first, 
but  as  the  burden  of  taxation  became  heavier  this  liability  was 
partly  transferred  to  real  estate."  ^  This  transfer  of  the  burden 
to  real  estate  began  with  the  practice  of  making  the  personal 
tax  a  lien  upon  the  property  of  absentees,  or  of  persons  dying 
before  the  payment  of  the  tax.  The  general  property  tax  in  a 
form  like  that  in  use  in  New  England  did  not  exist  in  Virginia 
before  the  Revolution.  The  grossness  of  the  poll  tax  was 
modified  by  some  reference  to  the  different  kinds  of  property 
owned.  In  consequence  of  the  failure  to  develop  a  good 
system  of  direct  taxes  Virginia  resorted  to  indirect  taxes,  ex- 
port duties  on  tobacco  and  hides,  import  duties  on  liquors 
and  slaves,  and  some  general  tunnage  duties  forming  the  main 
features. 

The  third  or  central  system  is  fairly  represented  by  New 
York.  There,  under  the  West  India  Company,  1621-1664, 
taxation  first  took  the  form  of  moderate  indirect  taxes  on  goods 
imported  and  exported  and  imposts  on  the  consumption  of 
beer,  wine,  and  spirits.  It  was  after  the  passage  of  the  colony 
into  the  hands  of  the  English  that  attempts  were  made  to 
develop  the  property  tax.  The  actual  existence  of  this  tax 
begins  with  the  formation  of  the  Assembly  after  1683.^ 

In  all  parts  of  the  United  States  after  the  Revolutionary 
War  the  main  reliance  for  local  revenue  was  the  general  prop- 
erty tax.  The  commonwealths,  as  such,  had  little  need  for 
revenues  until  after  1840.     In  the  formation  of  the  Union  indi- 

^  Financial  History  of  Virginia,  p.  21. 

2  See  Schwab,  Die  Entivickelung  der  Vermogensteuer  im  Staate  New  York,  Jena, 
i8go.  Also  Schwab,  History  of  the  New  York  Property  Tax,  Pub.  of  the  Amer.  Econ. 
Assn.,  V,  5. 


TAXATION  BEFORE  THE  INDUSTRIAL  REVOLUTION      113 

rect  taxes  were  made  the  prerogative  of  the  federal  government, 
so  that  the  commonwealths  had  to  resort  to  other  means.  The 
character  of  direct  taxation  in  the  United  States  since  the  for- 
mation of  the  Union  will  be  treated  in  the  next  chapter.  The 
differences  in  the  forms  of  taxation  in  the  different  parts  are  due 
both  to  political  and  economic  differences. 


CHAPTER   V 

THE  DEVELOPMENT   OF  TAX   SYSTEMS  FROM   THE 
INDUSTRIAL  REVOLUTION  TO  THE  WORLD  WAR 

Section  i.  Changes  in  Taxation  Due  to  the  Industrial 
Revolution.  —  The  trend  of  the  development  of  taxation  was 
abruptly  changed  by  the  industrial  revolution  at  the  close  of 
the  last  century.  On  the  one  hand,  the  development  of  con- 
stitutionaHsm,  vesting,  as  it  did,  the  control  of  the  purse  in  the 
people,  and  especially  in  the  taxpayers,  had  the  inevitable 
effect  of  changing  the  ideas  underlying  the  tax  systems.  New 
ideas  as  to  the  justification  of  taxation  developed,  and  with 
them  a  tendency  to  seek  new  measures  of  taxation.  On  the 
other  hand,  the  rapid  increase  in  wealth,  the  growth  of  new 
forms  of  wealth,  such  as  invested  capital,  the  birth  of  new  kinds 
of  property,  and  of  ways  of  holding  property,  as  the  many  kinds 
of  credits,  and  the  rapid  change  in  the  distribution  of  wealth 
among  the  different  classes  in  the  community, — ^all  of  these  and 
other  similar  causes  led  to  the  constant  extension  of  taxation 
to  the  new  forms.  Old  taxes  which  were  well  suited  to  certain 
simpler  conditions  of  society  become  under  new  conditions 
unjust,  and  give  rise  to  dissatisfaction,  to  many  attempted  and 
some  accompHshed  reforms.  These  reforms  in  turn  prove  no 
more  satisfactory  in  the  long  run,  for  the  conditions  they  were 
intended  to  meet  change  again. 

Just  as  the  attention  of  economists  was  chiefly  directed  to  the 
study  of  productive  agencies  during  the  first  three-quarters 
of  the  century,  so  the  general  tendency  of  the  same  period  in 
finance  may  be  broadly  characterised  as  an  attempt  to  com- 
pel the  different  agencies  of  production  to  contribute  to  the 

114 


THE    DEVELOPMENT  OF  TAX   SYSTEMS  115 

support  of  the  government.  It  is  claimed  that  economists  have, 
during  recent  years,  turned  their  attention  more  to  the  con- 
sideration of  questions  of  distribution,  and  it  is  certainly  true 
that  the  most  recent  tax  reforms  have  been  in  the  direction  of 
securing  a  better  division  of  the  burden  among  the  sharers  of 
the  new  wealth  rather  than  among  the  producers  thereof.  Sub- 
ordinate to  this  tendency  are  various  proposals  and  attempts 
to  alter  the  distribution  of  wealth  by  the  use  of  the  taxing 
power. 

The  demands  upon  the  revenues  increased  vastly  during  and 
immediately  after  the  period  of  war  which  followed  the  French 
Revolution.  Large  debts  had  been  accumulated ;  great  armies 
and  navies  claimed  support  even  in  times  of  peace.  New 
functions  were  being  thrust  upon  the  governments.  Moreover, 
the  new  economic  era  demanded  the  payment  of  all  charges 
upon  the  State  in  money  and  necessitated  the  collection  of 
revenues  in  money.  The  old  feudal  receipts  and  services  be- 
came more  and  more  inadequate ;  new  industrial  receipts  were, 
in  general,  not  calculated  to  be  much  larger  than  the  sums 
necessary  to  support  the  service  or  institution  which  furnished 
them.  Consequently,  taxation  on  an  ever  increasing  scale  be- 
comes the  basis  of  all  State  finances.  Taxation  is  no  longer 
regarded  as  a  temporary  expedient  to  meet  passing  and  ex- 
traordinary needs.  It  is  admittedly  a  necessary  and  permanent 
policy. 

The  doctrine  of  pohtical  equality  when  generally  accepted 
leads  to  a  demand  for  universality  and  equality  of  taxation. 
The  difficulties  that  arise  are  no  longer  as  to  the  justification 
of  taxation  in  general,  but  as  to  the  justice  of  certain  forms 
and  measures  of  taxation.  The  main  question  is,  what  is 
equality,  and  what  the  best  method  of  attaining  it.  The 
methods  and  direction  of  reform  were  necessarily  prescribed  by 
the  constitutions  of  the  various  countries  and  differ  much  from 
land  to  land.  Different  economic  and  social  conditions  have 
also  an  inevitable  effect.  Among  the  constitutional  features 
that  determine  the  direction  of  taxation  the  following  may  be 
mentioned.     First,  federal  governments  have  generally  been 


Il6  INTRODUCTION  TO   PUBLIC   FINANCE 

excluded  from  the  field  of  direct  taxation.  The  central  govern- 
ments of  the  German  Empire,  Switzerland,  and  the  United 
States  depended  for  revenues  from  taxation  on  customs  duties 
and  internal  excises.  The  sense  of  personal  loyalty  to  the  cen- 
tral government  is  inferior  to  that  to  the  commonwealth  govern- 
ments so  far  as  wiUingness  to  contribute  directly  to  its  support 
is  concerned.  Those  who  pay  a  direct  tax  wish  to  see  the  money 
expended  near  at  hand  and  under  their  own  eyes.  The  partial 
concealment  or  at  least  lack  of  prominence  of  the  indirect  con- 
tribution permits  of  its  collection  without  calling  the  attention 
of  the  contributors  forcibly  to  the  fact  that  they  are  taxed  by 
a  new  authority.  Just  that  advantage  of  partial  concealment 
in  this  tax  which  appealed  so  strongly  to  the  monarchies,  before 
the  birth  of  political  consciousness  on  the  part  of  the  people, 
appeals  to  the  federal  governments.  At  the  same  time  the 
practical  necessity  of  uniform  rates  over  the  whole  country, 
which  arises  from  the  fact  that  these  taxes  disturb  the  economic 
balance  of  industry  and  commerce,  and  the  greater  ease  of 
administration  with  a  larger  territory  and  a  single  boundary, 
make  it  advisable  to  put  all  of  them  in  the  hands  of  the  central 
organ.  It  was  the  latter  considerations  in  regard  to  custom 
duties  that  led  to  the  establishment  of  the  Zollverein  and  even- 
tually of  the  German  Empire.^ 

On  the  other  hand,  the  different  States  of  which  the  federal 
governments  are  composed  have  shown  themselves  inclined  to 
restrict  their  taxation  to  the  direct  taxes,  leaving  all  but  a 
few  of  the  indirect  ones  to  the  central  governments. 

But  this  separation  of  the  assessment  of  direct  and  indirect 
taxes  between  different  authorities  has  been  productive  of  great 
difficulties.  For  it  is  impossible  to  assess  any  tax  justly  and 
equally  without  reference  to  the  other  burdens  already  imposed 
on  the  contributors.  It  would  seem  that  the  demands  of  justice 
which  dictate  that  the  whole  system  of  taxation  should  work 
toward  a  definite  and  single  purpose,  will  necessitate  either  the 

1  See  Bowring's  Report  on  the  Prussian  Commercial  Union,  Parliamentary 
Documents,  1840,  Vol.  XXI,  pp.  I717.  Reprinted  in  Rand,  Economic  History,  p. 
170.     Also  Legoyt's  La  France  ei  I  Elranger,  Vol.  I,  pp.  250-255 ;  ibid. 


THE  DEVELOPMENT   OF  TAX   SYSTEMS  I17 

coordination  of  these  forms  or  the  placing  of  both  of  them  in  the 
hands  of  the  same  authorities.  The  proper  coordination  of  all 
taxes  is  hard  to  accomplish  when  the  taxing  power  is  in  differ- 
ent hands.  This  is  one  of  the  hardest  problems  of  American 
taxation. 

The  development  of  direct  taxation  will  now  be  traced  in 
detail  by  reference  to  some  of  the  more  important  countries. 
Indirect  taxes  cannot  properly  be  said  to  have  undergone  any 
process  of  development.  Many  changes  have,  indeed,  been 
made,  dictated  by  different  economic  theories  and  purposes. 
But  it  has  been  simply  a  flux  backward  and  forward.  Sometimes 
ulterior  aims,  as  protection,  have  been  abandoned  and  strict 
fiscal  principles  allowed  sway.  In  those  cases  we  find  a  simpli- 
fication and  a  decrease  in  the  number  of  articles  taxed.  But 
no  general  principles  have  been  developed. 

Sec.  2.  Reforms  of  Taxation  in  Different  Countries.  — 
Probably  the  most  thorough  attempts  to  reform  taxation  in 
accord  with  clearly  recognized  principles  of  theoretical  justice 
have  been  in  Prussia.  That  country  has  taken  advantage  from 
time  to  time  of  the  advice  of  men  of  science.  It  has  been 
doubly, happy  (i)  in  having  a  goodly  number  of  unpartisan 
financial  scientists  to  draw  upon ;  (2)  in  being  able  to  draw 
upon  them  for  advice,  either  by  counting  their  pupils  among 
its  fiscal  officers  or  placing  the  scientists  themselves  on  its  tax 
boards 'and  commissions.  It  has  been  able  to  make  changes 
with  a  broad  conservatism  that  looked  toward  the  gradual 
realisation  of  accepted  ideals.  With  characteristic  visionary 
eagerness,  France  has  several  times  started  out  to  obtain  at  a 
single  bound  some  new  ideal,  but  has  each  time  fallen  upon 
forms  and  methods  but  little  better  than  those  in  vogue  before. 
In  England,  special  difficulties  and  objections  have  been  met 
with  little  reference  to  any  general  plan.  The  result  has  been 
a  steady  approach  to  a  better  state  of  affairs,  with  only  an  occa- 
sional intensification  of  existing  evils,  due  to  the  attempt  to 
cure  symptoms  rather  than  to  seek  the  underlying  causes  of  the 
trouble.  In  the  United  States  there  have  been  spasmodic  and 
ill-directed  attempts  at  the  removal  of  a  few  clearly  recognised 


Il8  INTRODUCTION  TO   PUBLIC   FINANCE 

abuses;  and  without  any  consistent  attempt  to  change  the 
system,  the  result  has  been  a  decided  modification.  The 
general  failure  of  the  property  tax  to  reach  personal  property 
gave  rise  at  first  to  vigorous  efforts  to  extend  and  sharpen  the 
methods  of  assessment.  These  attempts  failing,  other  methods 
of  reaching  the  mass  of  personal  property  were  devised,  which 
have  resulted  in  a  partial  change  of  system  wherever  they  have 
been  successful. 

Sec.  3.  Tax  Reforms  in  Prussia.  —  The  most  instructive 
country  to  study  is  Prussia.  The  line  between  the  old  and  the 
new  may  be  drawn  at  the  reforms  of  Stein  and  Hardenburg  in 
the  forms  of  land  tenure.  These  reforms  may  be  regarded  as 
having  been  accompHshed  in  1811.  Briefly  stated,  their  result 
was  to  abolish  personal  serfdom,  dissolve  the  feudal  partner- 
ship between  tenants  and  proprietors,  and  estabHsh  free  trade 
in  land.^  Although  these  reforms  had  to  do  mainly  with  land, 
and  although  the  accompanying  edict  of  1810  promised  speedy 
reform  of  the  land  tax  on  the  basis  of  a  new  survey,  or  cadastre, 
nothing  material  was  accomplished  in  the  reorganisation  of 
this  tax  until  1861.  In  that  year  the  land  tax  was  rearranged 
for  the  entire  kingdom  on  the  basis  of  a  new  and  rapidly  executed 
survey.  Some  twenty  different  provincial  land  taxes,  with  up- 
wards of  one  hundred  minor  variations,  which  had  existed 
before  that  time,  were  merged  into  an  apportioned  tax  upon 
the  net  product  of  each  piece  of  land  as  given  in  the  cadastre. 
This  tax  recently  yielded  about  40,000,000  M.  annually. 

The  reforms  which  preceded  this  were  those  of  the  indirect 
consumption  taxes,  out  of  which  finally  emerged  the  personal 
class  tax.  The  edict  of  1810,  which  was  referred  to  above 
as  promising  a  reform  of  the  land  tax,  seriously  attempted  to 
remove  inequalities  by  destroying  many  feudal  exemptions  and 
privileges,  and  removing  local  differences.  A  general  scheme 
of  consumption  taxes  on  necessaries,  of  which  the  excise  on 
meal  is  a  type,  was  planned  for  city  and  country  ahke.     It  was, 

^Seeley's  Life  and  Times  of  Stein,  Vol.  I,  pp.  178-207.  Morier,  "The  Agrarian 
Legislation  of  Prussia  during  the  Present  Century,"  in  Probyn  [Editor],  Systems  oj 
Land  Tenure  in  Various  Countries,  pp.  306-316.     See  Selections  in  Rand. 


THE   DEVELOPMENT  OF  TAX  SYSTEMS  119 

however,  immediately  found  that  the  meal  tax  was  hard  to 
collect  in  rural  parts.  As  early  as  i8ii,  therefore,  a  poll  tax 
of  one-half  thaler  from  every  person  over  twelve  years  of  age 
was  substituted  for  the  meal  tax  in  all  places  except  the  larger 
towns.  In  1820  this  tax,  still  applying  to  the  same  places, 
developed  into  a  classified  poll  tax ;  i.e.  all  persons  were  grouped 
according  to  rank,  profession,  and  general  prosperity,  into  a 
few  classes,  which  were  then  taxed  per  capita  at  different  rates 
for  each  class.  Somewhat  modified  the  next  year,  so  as  to  make 
twelve  classes,  in  groups  of  three  each,  and  with  rates  which 
ranged  from  one-half  thaler  to  144  thalers,  and  covering  all 
persons  over  fourteen  years  old,  this  tax  endured  thirty  years. 
As  before,  this  tax  did  not  extend  to  the  large  cities,  where 
the  excise  on  meal  and  meat  was  regarded  as  placing  the  same 
burden  on  the  people.  Such  a  remarkably  clear  perception  of 
the  fact  that  indirect  taxes  are  practically  the  equivalent  of 
direct  taxes  in  the  individual  burden  they  impose  is  not  often 
met  with  in  fiscal  history. 

The  Income  Tax.  —  In  1851,  this  tax  was  changed  in  order 
to  make  room  for  the  introduction  of  an  income  tax  on  all 
persons  having  an  income  of  over  1000  thalers.  Those  per- 
sons whose  incomes  were  below  this  amount  were  taxed  in  the 
large  cities  by  the  meal  and  meat  tax ;  in  the  country  and  in 
small  towns,  by  a  class  tax,  like  the  old  one,  with  rates  rang- 
ing from  one-half  thaler  to  24  thalers,  according  to  the  supposed 
income.  Persons  living  in  large  cities  who  paid  the  income  tax 
were  allowed  to  deduct  20  thalers  from  their  income  as  com- 
pensation for  the  meal  and  meat  tax  they  were  supposed  to 
have  paid.  Later  reforms  removed  these  gate  excises  except 
for  local  purposes.  As  the  income  tax  forms  a  special  topic 
in  a  later  chapter,  we  will  not  at  present  follow  the  details  of 
its  development  and  reform.  It  is  sufficient  to  say  that  it  was  a 
progressive  tax  on  the  income  of  every  person.' 

When  the  land  tax  was  reformed  in  1861,  the  building  tax  was 
separated  from  it,  having  been  until  that  time  a  part  of  it ; 
and  all  old  taxes  of  a  similar  sort  were  merged  in  the  new  one. 

» See  Chap.  IX. 


I20  INTRODUCTION   TO   PUBLIC   FINANCE 

This  tax  is  assessed  in  the  cities  according  to  the  rental  of  the 
buildings,  and  in  the  country  according  to  the  size  of  the  lands 
connected  with  the  houses,  and  other  characteristics. 

One  of  the  reforms  that  were  made  after  the  peace  of  Tilsit 
to  strengthen  the  weakened  economic  resources  of  the  country- 
was  the  establishment  of  general  industrial  freedom.  Naturally, 
such  a  change  would  have  been  regarded  as  a  failure  from  the 
standpoint  of  the  statesmen  of  the  times,  if  it  could  not  be  made 
to  yield  a  revenue  to  the  treasury ;  so  the  new  industries  were 
burdened  with  a  new  tax.  This  tax,  which  was  very  weak,  and 
which,  wisely,  perhaps,  failed  to  meet  all  the  new  forms  of 
industry  which  came  into  existence,  was  subjected  to  a  thorough- 
going reform  in  1891.  But  it  was  at  that  time  transferred  to 
the  local  governments.  Capital  invested  and  some  of  the 
permanent  features  of  each  business  form  the  basis  of  this  tax. 

The  Prussian  system,  as  it  existed  before  the  great  reforms  of 
1893,  may  now  be  seen  as  a  whole.  It  consisted  of  two  parts: 
(i)  There  was  a  group  of  three  complementary  taxes  upon  the 
produce  of  property  and  capital,  —  the  land  tax,  the  building 
tax,  and  the  industry  tax ;  (2)  there  was  a  system  of  personal 
taxes  culminating  in  an  income  tax.  The  former  group,  true 
to  the  economic  tenets  of  the  first  three-quarters  of  the  century, 
taxed  the  productive  agencies.  The  latter,  although  it  origi- 
nated as  a  consumption  tax,  aimed  at  taxing  the  shares  in  dis- 
tribution. Thus  the  older  consumption  taxes,  which  were 
originally  assessed  without  any  very  clear  idea  of  what  the 
justification  was,  but  were  used  because  productive  of  large 
revenues,  yielded  to  new  taxes  supposed  to  be  more  fairly  in 
accord  with  the  modern  system  of  distribution. 

The  Great  Reforms  of  1893.  —  We  are  now  in  position  to  see 
the  significance  of  the  great  reforms  of  1893  (all  of  which  went 
into  effect  in  1895),  made  under  the  leadership  of  Finanzminister 
Dr.  Miquel.  These  reforms  place  Prussia  far  in  advance  of  all 
other  countries  in  the  theoretical  perfection  of  her  tax  system.' 
The  income  tax,  which  has  long  been  correctly  regarded  as  the 

'  See  Seligman,  Essays,  pp.  330-339.  References  to  larger  and  more  detailed 
statements  are  given  there. 


THE  develop:ment  of  tax  systems 


121 


foundation  of  the  Prussian  tax  system,  was  subjected  to  a 
thorough  reform  in  1891.'  It  was  strongly  urged  at  that  time 
that  income  from  property  represented  a  far  higher  faculty, 
per  unit,  than  income  from  labour  and  personal  exertion,  and, 
therefore,  that  a  perfect  system  should  contain  two  kinds  of 
progression :  one  that  taxed  larger  incomes  more  heavily  than 
smaller  ones ;  another  that  taxed  incomes  from  property  more 
heavily  in  proportion  than  incomes  from  labour.  It  was  felt 
that  the  existing  produce  taxes  (Ertragsteuern) ,  the  land,  build- 
ing, and  industry  taxes,  failed  to  accomplish  this  end.  Hence 
one  of  the  reforms  of  1893  was  the  surrender  of  these  taxes 
to  the  communes,  and  the  initiation  of  a  general  property  tax 
as  supplementary  to  the  income  tax.  This  tax,  which  can  be 
properly  understood  only  when  its  supplementary  character 
is  held  in  mind,  is  arranged  as  follows : 

The  tax  is  one-half  per  mill  on  the  lower  limit  of  the  class 
within  which  the  property  falls.  The  classes  go  by  stages 
of  2000  M.  from  6000  M.  to  40,000  M.,  of  4000  M.  up  to  60,000 
M.,  of  10,000  M.  up  to  200,000  M.,  and  above  that  of  20,000  M. 
each. 

Thus. 


From 


Property 

Tax 

Up 

to 

6,000 

M.      . 

exempt 

6,000 

8,000 

U 

.    3M. 

8,000 

10,000 

ti 

4 " 

10,000 

12,000 

iC 

•    5 " 

20,000 

22,000 

n 

10 " 

40,000 

44,000 

il 

20 " 

60,000 

70,000 

(t 

.     30  "  etc 

Above  200,000  M.  the  stages  are  20,000  M.  each,  and  the 
tax  increases  10  M.  in  each  stage. 

This  tax  being  supplementary  to  the  income  tax  accomplishes 
the  result  of  imposing  a  differential  rate  on  funded  income  as 
against  unfunded  income. 

The  abandonment  by  the  State  of  the  three  old  taxes  on  land, 
buildings,  and  industry  rendered  the  reform  of  local  taxation 

1  See  Chap.  IX. 


122  INTRODUCTION  TO  PUBLIC   FINANCE 

possible.  As  has  already  been  said,  the  proper  coordination 
of  all  tax  burdens  is  one  of  the  chief  problems  of  modern  tax 
reform.  With  the  exception  of  the  beer  taxes,  and  the  meat 
and  meal  taxes  still  used  by  some  of  the  cities,  local  taxation  in 
Prussia  is  mainly  direct.  Most  of  it,  until  1895,  took  the  form 
of  percentages  additional  to  the  rates  of  the  royal  taxes.  In 
some  cities  there  were  important  special  local  taxes,  like  the 
house  rent  tax  in  Berlin.  Prussia,  also,  grants  subsidies  from 
the  royal  treasury  to  the  local  bodies  for  special  purposes. 
But  the  symmetry  of  the  national  system  was  somewhat  de- 
stroyed by  these  additional  rates.  Such  additions  to  the  in- 
come tax  were  especially  intolerable.  Real  estate  is,  more- 
over, a  particularly  good  basis  for  local  assessment.  It  cannot 
evade  the  tax,  and  it  is  the  recipient  of  particular  benefits  from 
good  local  government.  The  same  is  true  of  businesses  of  a 
local  character,  although  it  is  not  safe  to  let  the  rate  vary  from 
place  to  place.  Hence  these  three  taxes  were  handed  over  to 
the  local  bodies.  At  the  same  time  the  attempt  was  made  to 
regulate  all  other  sources  of  local  revenues. 

The  Prussian  system  as  it  now  stands  comes  nearest  to  the 
realisation  of  the  taxation  of  faculty  of  any  in  the  world.  The 
chief  difficulties  that  have  arisen  are  those  of  assessment.  The 
progressive  rate  gives  rise  to  a  special  incentive  to  the  conceal- 
ment of  larger  incomes,  and  not  even  the  general  excellence 
of  Prussia's  administration  has  been  preventive  of  under-assess- 
ment.^ 

Sec.  4.  Development  in  France.  —  In  France  indirect  taxa- 
tion has  probably  found  a  higher  development  than  anywhere 
else.  Indirect  taxes  yielded  in  1908  over  2,000,000,000  francs, 
against  560,000,000  francs  from  direct  taxes.  Some  of  the 
main  taxes  are  on  the  consumption  of  wine,  spirits,  beer,  sugar, 
salt,  tobacco,  etc. ;  there  are  also  the  octrois  or  gate  duties  col- 
lected by  some  of  the  cities  as  a  means  of  contributing  their 
share  of  some  of  the  direct  taxes  to  the  general  treasury.  There 
are  also  the  taxes  on  acts  and  transfers,  which  will  be  treated 

1  See  the  revelations  of  the  Bochum  investigations,  quoted  by  Wagner  in  Schanz 
Finanzarchiv,  XVIII  year,  Vol.  II,  pp.  107,  108. 


THE   DEVELOPMENT  OF  TAX  SYSTEMS  1 23 

under  fees,  since  they  assume  a  private  benefit,  and  the  customs 
duties.  Not  peculiar  to  France,  but  receiving  a  high  develop- 
ment there,  is  the  mode  of  collecting  a  tax  on  consumption  by  a 
monopoly  of  the  manufacture  of  tobacco  in  the  hands  of  the 
government.  The  imperative  necessity  under  which  France  la- 
boured all  through  the  XlXth  century  of  continually  increasing 
her  revenues,  and  the  danger  of  making  the  burden  unbearable 
if  thrown  upon  the  existing  direct  taxes,  as  well  as  the  desire  on 
the  part  of  the  legislators  of  concealing  so  far  as  possible  the 
actual  burden,  lest  an  impatient  constituency  rebel,  accounts 
well  for  the  relatively  high  development  of  indirect  taxation. 
The  preference  for  indirect  taxes  as  the  main  reliance  of  the 
pubhc  revenues  argues,  however,  a  low  stage  of  political  ethics. 
The  more  highly  developed  the  consciousness  of  citizenship  and 
membership  in  the  State,  the  easier  it  is  to  make  direct  taxation 
effective. 

Direct  taxation  in  France  dates  in  its  present  form  from  the 
Revolution.  All  the  taxes  of  the  ancient  monarchy  were  abol- 
ished at  that  time  and  a  fixed  scheme  of  taxes  on  revenue-yield- 
ing property  substituted.  This  system  of  direct  taxes  has 
four  chief  members:  (i)  the  tax  on  real  estate,  known  as  the 
"  impot  fonder^';  (2)  the  apportioned  tax  on  polls  and  rents 
of  dwellings,  "  cote  personnelle  et  mobilierc  ";  (3)  the  tax  on  doors 
and  windows,  "  impot  sur  les  partes  et  fenetres  ";  (4)  the  tax  on 
business,  "  impot  des  patentes^  ^  Supplementary  to  these 
taxes  are  a  number  of  taxes  classed  as  "  assimilated  to  the 
direct  taxes."  These,  so  far  as  they  flow  into  the  central  treas- 
ury, are :  (i)  the  mining  dues,  or  the  royalties  from  the  mining 
rights,  "  redevances  des  mines  ";  (2)  the  fees  for  the  certifica- 
tion ("verification  ")  of  weights  and  measures;  (3)  the  tax  on 
property  held  in  mortmain,  that  is,  property  held  in  perpetuity 
by  the  communes,  hospitals,  churches,  seminaries,  charitable 

*  " Palentes"  is  translated  by  Leroy  Bcaulieu  by  "licenses,"  Science  des  Finances, 
Vol.  I,  p.  39^.  There  is  no  exact  English  etjuivalent.  The  "license"  in  this  case 
is  little  more  than  evidence  of  the  payment  of  the  tax.  The  term  "patent"  does 
not  seem  to  imply,  as  the  term  "license"  does,  the  granting  of  a  special  privilege. 
The  term  "license"  is,  however,  not  infrequently  used  in  iMiglish  to  indicate  a  tax 
on  business. 


124  INTRODUCTION  TO  PUBLIC   FINANCE 

institutions,  and  the  like,  "  taxes  des  Mens  de  la  main  morte  "; 
(4)  the  taxes  on  horses  and  carriages,  "  impot  sur-  les  chevaux  et 
les  voitiires  ";  (5)  a  number  of  miscellaneous  fees  and  charges 
of  which  the  charges  for  the  inspection  of  pharmacists,  grocers, 
druggists,  and  herbists  are  examples. 

The  real  estate  tax,  the  poll  and  rents  of  dweUings  tax,  and 
the  door  and  window  tax  are,  in  most  part,  apportioned  taxes. 
The  real  estate  tax,  "  impot  fancier, "  was,  down  to  1890,  a  com- 
bined tax  on  agrarian  lands  and  on  land  with  buildings.  It 
was  apportioned  on  the  basis  of  a  very  elaborate  survey  and 
valuation  completed  in  1850  and  carefully  kept  up  to  date. 
These  taxes,  like  the  other  apportioned  taxes,  were  apportioned 
in  successive  steps,  first  to  the  departements,  then  to  the  arron- 
dissements,  and  then  to  the  communes,  by  the  several  legislative 
bodies,  and  finally  divided  among  the  individuals  in  each  of  the 
communes  by  a  "  conseil  de  repartition."  In  1890  the  tax  on 
dwellings,  that  is,  the  tax  on  land  with  buildings  on  it  {propriete 
bdtie),  was  separated  from  the  agrarian  land  tax  and  the  amount 
levied  on  the  land  was  somewhat  reduced.  In  1897  further 
relief  was  granted  to  small  landed  properties.  In  1908  the 
impot  fancier  yielded  200,000,000  francs.  The  land  tax  is  still 
an  apportioned  tax,  but  that  on  dwellings,  or  on  propriete  bdtie, 
is  now  proportioned,  and  the  uniform  rate  is  about  3.2  per  cent. 

The  tax  on  polls  and  rents  of  dwellings  is  peculiar  to  France, 
the  same  combination  not  being  found  in  the  tax  systems  of 
other  countries,  although  the  elements  thereof  are  not  uncom- 
mon. This  tax,  the  pcrsonnel-mobilier ,  as  it  is  called,  is  two 
taxes  in  one,  a  tax  on  polls  and  a  tax  bearing  the  somewhat 
misleading  designation  "  mobilier."  This  latter  tax  was  orig- 
inally designed  to  cover  personal  property,  hence  its  name, 
and  thus  to  supplement  the  impot  fancier.  The  personal  or  poll 
tax  element  of  this  tax  is  due  from  every  citizen  of  France  and 
from  every  resident  enjoying  civil  rights,  except  paupers,  married 
women  living  with  their  husbands,  and  children,  whether  of  age 
or  not,  Hving  with  their  parents  or  guardians,  and  not  enjoy- 
ing an  independent  income.  It  is  the  same  in  rate  for  all  the 
inhabitants  of  a  given  locality  and  the  rate  is  fixed  at  three 


THE   DE\ELOPj\IENT   OF   TAX   SYSTEMS  1 25 

days'  wages.  The  rate  at  which  the  wages  shall  be  assessed  is 
determined  each  year  by  the  general  council  of  each  departe- 
ment.  It  may,  however,  not  be  fixed  at  less  than  one-half 
franc,  nor  at  more  than  one  franc  and  a  half.  Thus  the 
minimum  tax  is  one  franc  and  a  half  and  the  maximum 
four  francs  and  a  half.  The  other  element  of  this  tax,  the 
mobilier,  is  assessed  according  to  the  rental  value  of  inhabited 
houses.  It  is  in  this  part  of  this  two-headed  tax  that  the  appor- 
tionment is  worked  out.  The  poll  tax  falls  short  of  raising  the 
commune's  share  of  the  combined  taxes,  and  the  balance  of  the 
quota  is  assessed  upon  the  rentals  of  dwellings  (loyer  de  habita- 
tion). Some  of  the  large  cities,  Paris,  Lyons,  Marseilles,  and  a 
few  others,  raise  a  part  or  even  the  whole  of  their  quota  by  means 
of  duties  on  goods  brought  into  the  cities,  i.e.  octrois,  and  do  not 
levy  on  rentals. 

The  door  and  window  tax  is  an  apportioned  tax  rated  accord- 
ing to  the  number  of  windows  and  doors  in  the  houses.  It  was 
intended  to  supplement  the  personal  and  dwelling  tax,  but  it  is 
really  an  addition  to  the  real  estate  tax.  It  is  paid  by  the  owner 
and  he  is  allowed  to  shift  it  if  he  can  to  the  tenant. 

The  business  tax  is  an  old  one.  Established  in  1791,  re- 
modelled in  1844,  it  is  now  enforced  under  a  law  that  was  adopted 
in  1880.  Unlike  the  other  direct  taxes  it  is  regarded,  not  as  an 
apportioned,  but  as  a  proportioned  or  rated  tax.  The  "  impot 
des  patentes  "  is  imposed  on  every  person,  native  or  alien,  who 
carries  on  any  trade  or  profession  in  France,  except  agriculture 
and  a  few  others  that  are  especially  exempted.  The  aim  is  to 
tax  the  profits  of  industry  or  of  a  profession,  as  nearly  as  may  be 
proportionately.  The  methods  of  determining  the  rates  for  the 
different  occupations  or  industries  are  extremely  complex,  so 
much  so  that  only  the  most  general  outline  can  be  attempted 
here.  The  objects  of  this  complex  system  of  rates  are  to  avoid 
on  the  one  hand  any  inquisitorial  prying  into  the  affairs  of  the 
individual  taxpayers,  and  on  the  other  hand  to  shun  the  danger 
of  receiving  false  declarations  as  to  the  amount  of  the  profits. 
This  is  done  by  seizing  upon  certain  concrete,  external  signs, 
or  natural  and  obvious  characteristics,  as  evidence  of  the  size 


126  INTRODUCTION  TO  PUBLIC   FINANCE 

of  the  profits.  In  general  the  rates  fall  into  two  parts.  The 
first  is  called  the  fixed  duty  {taxe  determinee).  This  is  the  same 
for  each  occupation  of  the  same  sort,  and  is  largely  independent 
of  any  of  those  conditions  which  make  one  occupation  more 
profitable  than  another  of  the  same  kind.  The  second  is  the 
proportional  rate,  based  on  certain  characteristics  that  are 
assumed  to  indicate  that  a  given  industry  is  more  or,  as  the  case 
may  be,  less  profitable  than  another  of  the  same  kind.  The 
fixed  duty,  however,  is  not  the  same  in  all  towns,  for  it  is  assumed, 
for  example,  that  a  druggist  in  a  large  town  makes  larger  profits 
than  one  in  a  small  place.  For  the  fixed  duty  occupations  are 
grouped  in  three  classes  and  fall  under  schedules  A,  B,  and  C 
of  the  law.  Class  A  includes  the  general  run  of  merchants 
and  artisans.  Merchants  are  again  divided  into  three  classes, 
according  as  they  sell  entirely  at  wholesale,  partly  at  whole- 
sale and  partly  at  retail,  or  entirely  at  retail.  In  this  class 
the  fixed  rate  is  based  on  two  considerations,  (i)  the  nature 
of  the  business  and  (2)  the  size  (population)  of  the  place 
in  which  the  business  is  conducted.  Thus  occupations  are 
divided  into  eight  general  classes  according  to  their  nature, 
and  for  each  of  these  there  are  nine  ratings  according  to 
the  size  of  the  place  in  which  they  are  located.  Class 
B  contains  a  number  of  businesses  in  connection  with  which 
it  seems  necessary  to  consider  the  size  of  the  enterprise  as 
well  as  the  size  of  the  place  and  the  nature  of  the  business. 
So  a  third  set  of  characteristics  is  introduced  supposed  to  show 
the  size  of  the  enterprise.  In  this  class  are  bankers,  depart- 
ment stores,  water  works,  hack  and  omnibus  companies.  Class 
C  includes  the  smaller  industrial  pursuits,  handicrafts,  and  the 
like.  In  this  class  the  size  of  the  place  is  not  taken  into  con- 
sideration, but  some  concrete  index  of  the  size  of  the  estab- 
lishment is  taken  in  connection  with  the  nature  of  the  business. 
Such  indices  are  the  number  of  appliances,  or  machines  used,  the 
number  of  workmen  employed,  and  the  like.  The  proportional 
part  of  the  rate  is  based  mainly  on  the  rental  of  the  place  of 
business  and  the  rental  of  the  home  the  proprietor  occupies. 
It  varies  for  each  of  the  main  classes  and  also  within  the  classes 


THE   DEVELOPMENT  OF  TAX  SYSTEMS  1 27 

These  rates  are  for  class  A  from  two  to  five  per  cent  of  the 
rental,  for  those  in  class  B  ten  per  cent,  in  class  C  from  one  and 
two-thirds  to  ten  per  cent.  The  "  liberal  "  professions,  such  as 
thoseoflaw}^ers,  doctors,  and  the  like,  pay  only  the  proportional 
rates. 

During  the  Great  War  France  found  her  tax  system  too  in- 
elastic.    An  income  tax  was  introduced  in  1916. 

Sec.  5.  English  Tax  Reforms.  —  The  English  system  of 
taxation  can  be  very  briefly  treated  here,  because  the  principal 
component  parts  will  be  discussed  in  detail  in  later  chapters. 
What  is  necessary  here  is  to  give  an  outline  of  the  system  as  a 
whole.  The  greatest  change  in  the  British  scheme  of  taxation 
within  this  period  was  the  ehmination  of  the  protective  prin- 
ciple from  the  customs  duties,  —  and  indirectly  from  the  excises 
also,  —  brought  about  in  the  period  from  1840-1850,  by  the 
abolition  of  the  corn  laws  and  the  agitation  leading  thereto. 
The  consequent  simplification  of  both  the  import  duties  and  the 
excises  rendered  it  possible  to  manage  them  purely  as  a  source 
of  revenue  with  a  view  to  obtaining  relatively  larger  sums. 
The  customs  duties,  the  entire  tariff  of  which,  1912,  contained 
only  40  rates,  and  the  somewhat  more  numerous  excises  and 
stamp  duties,  paid  one-half  the  total  annual  revenue.  The 
property  and  income  tax,  which  was  restored  in  1842  and  has 
since  been  the  variable  or  elastic  element  in  the  system,  will 
also  receive  special  attention  in  another  chapter.  Inasmuch 
as  this  famous  property  and  income  tax  is  a  system,  in  itself, 
of  five  taxes  which  are  calculated  to  fall  upon  the  chief  sources 
of  wealth,  it  compUes,  in  a  way,  with  the  requirements  of  uni- 
versality. Its  rate  is  degressive,  so  that  it  attempts  to  comply 
with  the  requirements  of  justice.  It  may  be  looked  upon  as 
the  complete  system  of  direct  taxation.  Outside  of  the  system 
there  are  two  remnants  of  older  taxes  which  are  anomalies  and 
destroy,  somewhat,  the  logic  of  the  system.  This  lack  of  any 
logical  reason  for  retaining  them  does  not  necessarily  form  any 
good  reason  for  abolishing  them.  They  give  rise  to  no  serious 
complaint,  they  are  old  and  have  been  in  the  main  capitalised, 
so  that  they  form  no  real  burden  at  present.    They  are  the  land 


128  INTRODUCTION  TO   PUBLIC   FINANCE 

tax  of  the  eighteenth  century,  which  is  now  a  redeemable  rent 
charge,  and  the  house  duty.  This  latter  developed  out  of  the 
hearth  tax  of  1662.  In  1688  it  had  been  replaced  by  a  window 
tax.  In  1778  a  tax  on  the  annual  rental  was  added  to  the  win- 
dow tax,  and  finally  after  1851  this  tax  on  the  rental  value  was 
left  to  stand  alone. 

There  is  still  another  tax  which  supplements  the  property  and 
income  tax,  and  that  is  the  inheritance  tax.  The  most  recent 
changes  in  these  inheritance  taxes,  —  "  death  duties,"  —  which 
have  existed  in  England  since  1694,  will  receive  attention  under 
another  heading.  The  important  thing  to  note  in  this  con- 
nection is  that  these  taxes  have  introduced  the  principle  of 
progression  very  extensively  into  the  tax  system  of  England. 

The  English  system  as  it  now  stands  consists  (i)  of  the 
customs  and  excise  duties ;  (2)  of  the  so-called  property  and  in- 
come tax,  a  degressive  tax  upon  five  kinds  of  income ;  (3)  two 
older  taxes,  the  land  tax  and  the  house  tax ;  (4)  a  graduated 
inheritance  tax;  and  (5)  a  number  of  stamp  taxes  on  deeds, 
receipts,  and  so  forth. ^ 

The  different  authorities  that  have  had  the  power  to  levy 
local  rates  in  England  are  very  numerous.  The  whole  system 
is  very  complex.  The  different  rates,  each  going  by  the  name 
of  the  authority  that  levies  it,  or  the  purpose  for  which  it  is 
collected,  are  mostly  upon  the  same  base ;  namely,  the  annual 
rental  of  the  various  tenements.  They  are  generally  levied 
upon  occupiers.  In  the  case  of  tenements  of  less  than  £10 
annual  value,  the  difficulty  of  collecting  from  the  occupier  is  so 
great  that  the  plan  of  making  the  landlord  advance  the  tax  has 
been  adopted.  He  then  shifts  it  to  the  occupier.  The  recent 
reforms  of  county  and  municipal  government  in  England  have 
resulted  in  a  simplification  of  local  rates. 

Sec.  6.  American  Tax  Chaos.  —  Like  the  English,  the 
American  system  can  be  but  briefly  treated  here,  since  many 
of  the  taxes  will  receive  our  attention  in  subsequent  chapters. 
The  principal  federal  taxes  have  been  customs  duties  and  excises. 

1  Williams'  The  King's  Revenue  contains  a  fine  outline  of  the  revenue  system  of 
England.     It  is  one  of  the  best  books  of  its  kind  ever  compiled. 


THE    DE\'ELOPMENT   OF   T.\X   SYSTEMS  129 

The  states,  or  commonwealths,  have  confined  themselves  rather 
closely  to  direct  taxes,  as  have  also  the  minor  civil  divisions. 
Down  to  1840,  commonwealth  taxation  was  very  meagre. 
]\Iany  of  the  states  attempted  to  get  along  without  recourse 
to  taxation  at  all,  depending  for  revenues  upon  the  sale  of  lands, 
fees,  and  other  sources. 

The  evolution  of  taxation  in  this  country  during  the  XlXth 
century  resulted  in  little  advance.  Indeed  it  had  been  to  make 
confusion  thrice  confounded.  Not  only  was  difficulty  found 
in  adjusting  the  spheres  of  the  different  taxing  authorities,  but 
no  sound  principle,  indeed  scarcely  any  principle  at  all,  had  been 
followed.  Before  the  Revolutionary  War  the  general  property 
tax,  whose  origin  we  have  already  seen,  answered  the  require- 
ments of  justice  and  equality  fairly  well.  As  has  been  frequently 
remarked,  the  American  people  were  a  saving  race.  As  fast 
as  they  created  wealth  they  turned  it  into  property.  The  forms 
of  property  were,  even  when  not  immovable,  tangible  and 
unconcealable.  Real  estate  formed  the  mass  of  it.  Movable 
property  consisted  of  furniture,  farm  utensils,  and  cattle.  There 
were  few  stocks  or  bonds,  or  other  forms  of  credit  in  which  to 
invest  wealth.  Among  such  a  people  a  tax  levied  on  property 
that  was  easily  ascertainable  answered  all  the  requirements. 

But  as  intangible  personal  property  increased,  as  oppor- 
tunities for  investment  multiplied,  it  became  impossible  to 
make  the  property  tax  "  general."  It  became  a  tax  on  real 
estate  except  for  the  few  conscientious  persons  who  declared 
their  personal  property.  Until  about  1900  the  commonwealth 
legislatures  made  but  half-hearted  attempts  to  sharpen  the 
procedure  of  assessment.  Since  that  date  a  number  of  the 
states  have  introduced  a  plan  of  central  control  of  the  local 
assessors  by  a  strong  central  commission.  Wherever  adopted 
this  has  resulted  in  marked  improvement  in  the  direction  of 
greater  equality.  Prompted  at  first  by  a  wave  of  popular 
excitement,  which  took  the  form  of  a  feeling  of  bitterness  toward 
certain  classes  of  capitalists,  the  legislatures  have,  from  time  to 
time,  attempted  to  reach  personality  by  taxing  the  corporations 
in  which  the  untaxed  funds  were  invested.    The  resulting  cor- 


130  INTRODUCTION  TO  PUBLIC   FINANCE 

poration  taxes  worked  some  improvement.  They  supplement 
the  general  property  tax  very  effectively.  Within  the  past 
twenty  years  a  number  of  states  have  been  remodelling  their 
tax  systems,  by  selecting  certain  sources  of  revenue  for  the 
use  of  the  state  or  central  governments  only,  leaving  the  gen- 
eral property  tax  to  the  minor  civil  divisions.  One  general 
result  of  this  movement  has  been  the  taking  over  of  the  taxa- 
tion of  corporations  by  the  state,  with  corresponding  increase 
in  efficiency  of  administration.  Sometimes  the  legislatures 
have  attempted  to  tax  mortgages,  as  if  they  were  a  part  of  the 
property  on  which  they  rest.  As  mortgages  have  to  be  recorded 
in  order  to  be  legal,  it  is  possible  to  get  at  the  full  value.  In 
some  commonwealths,  then,  the  mortgagee  is  taxed  on  his  in- 
terest in  the  property  and  the  owner  is  exempt  to  that  extent. 
In  California,  where  this  plan  has  been  most  extensively  tried,  the 
result  has  not  been  at  all  what  was  desired.  The  only  effect 
has  been  to  raise  the  rate  of  interest  on  mortgages  by  the  amount 
of  the  tax  plus  from  one-fourth  to  one  per  cent.  That  is,  the 
mortgagees  have  succeeded  in  shifting  the  burden  of  the  tax 
to  the  real  owners  with  a  handsome  addition  for  their  trouble. 
Such  a  shifting  is  always  possible  when  any  one  form  of  capital 
is  taxed,  leaving  other  forms  untaxed,  either  because  they  are 
exempt  or  because  they  escape  the  tax.  A  recent  development 
in  some  states  has  been  the  exemption  of  mortgages  from  taxa- 
tion as  property  under  the  general  property  tax  and  the  sub- 
stitution of  a  tax  at  a  low  rate,  known  as  a  recording  tax.  But 
in  general  and  in  most  of  the  commonwealths  the  American 
system  remains  what  it  has  been  since  1840,  —  a  regressive  tax 
on  real  estate,  supplemented  in  part  by  corporation  taxes  in 
some  commonwealths,  and  by  an  ever  increasing  number  of 
inheritance  taxes.  It  is  a  system  condemned  by  every  scien- 
tific writer  and  impartial  statesman,  but  retained  as  the  only 
source  of  revenue. 

The  difficulties  which  have  prevented  persistent  attempts 
at  reform  remain,  and  it  is  hard  to  see  how  they  can  be  overcome. 
No  one  commonwealth  can  afford  to  pursue  personal  property 
with  so  much  vigour  as  to  actually  impose  a  tax  on  all  of  it. 


THE  DEVELOPMENT  OF  TAX   SYSTEMS  131 

Only  concerted  action  could  accomplish  this.  Capital  is  suffi- 
ciently mobile  to  move  easily  from  commonwealth  to  common- 
wealth, and  if  compelled  to  bear  its  fair  share  of  the  burden  in 
one  and  not  in  another,  it  will  surely  migrate.  Legislators  are 
extremely  desirous  of  attracting  capital  and  very  wary  of  repel- 
ling it.  The  owners  of  capital  cannot  be  taxed  personally. 
They  change  their  residence  from  city  to  suburb  and  even  to 
unfrequented  rural  parts  on  the  slightest  increase  of  local  taxa- 
tion and  move  from  commonwealth  to  commonwealth  with 
equal  facility.  Residence,  too,  is  a  matter  of  intention,  and  it 
is  easy  if  personal  taxes  are  proposed  to  plead  residence  in 
another  commonwealth.  Concerted  action  being  practically 
impossible,  the  tax-dodger  is  safe. 

But  while  the  present  system  is  very  bad,  it  has  been  tolerated 
in  the  past,  and  arouses  less  discontent  at  present  than  might 
be  expected  because  it  falls  mainly  on  the  receivers  of  economic 
rent.  The  value  of  land  in  many  parts  of  the  United  States 
has  increased  very  rapidly  and  is  still  increasing  steadily ;  so 
that  in  those  parts,  while  the  taxed  owner  feels  the  burden 
severely,  he  consoles  himself  with  the  thought  that  he  is  largely 
or  wholly  reimbursed  by  the  increased  price  which  he  hopes  to 
get  for  his  land.  The  general  practice,  too,  of  assessing  real 
estate  at  a  fraction  of  its  value,  even  though  so  universal  as  to 
work  no  actual  lessening  of  the  burden  in  any  individual  case, 
tends  to  stifle  murmurs  of  discontent.  For  the  owner  secretly 
congratulates  himself  on  not  having  to  pay  on  all  of  it,  —  an 
illogical  basis  for  self-congratulation,  to  be  sure,  but  still  not 
infrequently  effective.  The  same  person,  too,  is  not  infre- 
quently the  owner  of  taxable  personal  property  which  he  con- 
ceals, and  he  is  less  uneasy  about  the  tax  on  real  estate  so  long 
as  he  is  able  to  save  the  other. 

Another  reason  for  the  absence  of  a  concerted  movement  of 
real  estate  owners  to  lessen  the  ])urden  arises  from  the  fact  that 
the  real  estate  tax  is  a  real  burden  on  the  property,  and  shifts 
itself  by  the  process  of  capitalisation.  For  the  new  purchaser 
gets  his  property  at  a  lower  j)rice  than  he  would  have  to  pay  if 
the  tax  had  not  been  imposed.     The  frequency  and  ease  with 


132  INTRODUCTION  TO  PUBLIC   FINANCE 

which  real  estate  changes  hands  gives  constant  occasion  for  this 
capitaHsation  of  the  tax.  Every  real  tax,  when  not  a  part  of 
a  well-organised  system  which  taxes  every  kind  of  property  or 
all  receivers  of  wealth,  can  be  shifted  in  this  way.  It  becomes 
a  rent  charge  on  the  property  to  which  it  is  thus  attached.  A 
dim  perception  of  this,  and  a  possible  realisation  of  the  fact 
that  a  reform  of  the  tax  system  might  transform  this  tax  into  an 
actual  burden  again,  may  lie  at  the  bottom  of  the  indifference 
with  which  the  average  landowner  views  proposed  reforms. 

All  of  this  selfish  indifference  is,  of  course,  mistaken.  It 
defeats  its  own  ends.  The  burden  of  taxation  is  light  only  when 
properly  adjusted  to  all  the  shoulders.  The  serious  effects  of  an 
unjust,  unequal,  and  ill-arranged  system  of  taxes  upon  the 
economic  forces  of  the  country  have  been  treated  elsewhere. 
The  property  tax  forms  the  subject  of  a  special  chapter. 

We  have  spoken  merely  by  courtesy  of  an  American  system. 
As  a  matter  of  fact  there  is  none  that  is  worthy  of  the  name. 
Federal  authorities  tax  with  no  reference  to  commonwealths 
and  municipalities ;  commonwealths  and  municipalities,  with- 
out reference  to  federal  action.  Municipal  taxes  are,  however, 
generally  adjusted  to  the  existing  commonwealth  taxes,  but 
only  in  such  a  way  as  not  to  make  the  resulting  burden  appear 
too  large.  Their  efforts  in  this  direction  have  only  served  to 
intensify  the  existing  inequalities. 

Sec.  7.  The  National  Tax  Association's  Model  Tax  System. 
—  A  movement  in  the  direction  both  of  a  better  system  or 
coordination  of  different  taxes  within  each  state  and  of  better 
relations  between  the  taxes  of  different  states  has  resulted  from 
the  preparation  by  the  National  Tax  Association  of  a  plan  for 
"  A  Model  System  of  State  and  Local  Taxation."  ^  This  re- 
port has  been  justly  characterized  by  Professor  T.  S.  Adams  as 
"  one  of  the  wisest  and  most  helpful  statements  ever  published 
concerning  the  proper  structure  of  the  tax  system  of  the  Ameri- 
can State."     The  report  proposes : 

(i)  A  personal  income  tax.     "  Every  person  having  taxable 

1  Proceedings  of  the  Twelfth  Annual  Conference  on  Taxation,  Chicago,  June  17— 
19,  1 91 9,  pp.  426-470. 


THE   DEVELOPMENT   OF  TAX   SYSTEMS  133 

ability  should  pay  a  direct  tax  to  the  government  under  which 
he  is  domiciled."  "  The  tax  should  be  levied  upon  persons  in 
respect  of  their  entire  net  incomes,  and  should  be  collected  only 
from  persons  and  at  places  where  they  are  domiciled.  It 
should  not  be  collected  from  business  concerns,  either  incorpo- 
rated or  unincorporated,  since  such  action  would  defeat  the  very 
purpose  of  the  tax."  Non-residents  earning  income  in  or 
receiving  income  from  sources  in  a  state  should  not  be  taxed. 

(2)  There  should  be  "  a  tax  upon  tangible  property,  levied 
exclusively  at  the  place  where  such  property  is  located  "  and 
"  intangible  property  of  all  descriptions  be  exempt  from  taxa- 
tion as  property."  The  tax-paying  ability  represented  by  such 
property  can  be  reached  in  other  ways. 

(3)  That  the  methods  of  taxation  applied  to  public  service 
corporations  be  improved  so  as  to  impose  an  equitable  burden 
upon  such  companies,  but  no  one  method  was  recommended. 

(4)  A  business  tax  "  levied  upon  the  net  income  derived 
from  business  carried  on  within  the  state  levying  the  tax." 

(5)  Improved  administration  involving  (a)  assessment  dis- 
tricts large  enough  to  justify  the  employment  of  a  permanent 
full  time  official ;  (b)  a  term  of  office  long  enough  to  develop 
efficiency,  at  least  four  years ;  (c)  power  of  removal  of  assessors 
by  the  state  tax  commission ;  (d)  a  permanent  central  state  tax 
commission,  with  broad  powers  over  the  entire  tax  system, 
state  and  local. 

The  plan  is  sufficiently  broad  and  flexible  to  be  adapted  to 
the  needs  and  conditions  of  any  state. 


CHAPTER   VI 

EXCISES ' 

Section  i.  Comparison  of  Excises  and  Customs.  —  Gen- 
erally speaking,  indirect  taxes  are  older  than  direct  taxes.  They 
are  suitable  to  a  more  primitive  organisation  of  society.  Hence, 
it  will  not  be  amiss  to  treat  them  before  we  analyse  the  direct 
taxes.  By  far  the  larger  part  of  the  indirect  taxes  are  on  con- 
sumption (Aufwandsteuern) .  Most  of  the  taxes  on  consumption 
fall  under  one  or  the  other  of  two  heads :  they  are  either  excises 
or  customs  duties.  In  the  United  States  the  excises  are  called 
internal  revenue  taxes.  Excises  may  be  defined  as  all  those 
taxes  levied  within  a  country  on  commodities  destined  for 
consumption.  Customs  duties  fall  on  commodities  as  they 
enter  or  leave  the  country.  In  their  effect  on  the  economic 
condition  of  the  country  and  on  the  tax-bearer  they  are  prac- 
tically the  same.  In  both  cases  the  persons  who  first  advance 
the  taxes  are  generally  supposed  to  reimburse  themselves  from 
the  persons  to  whom  the  wares  are  sold.  In  both  cases,  although 
less  often  in  the  case  of  excises,  it  may  be  true  that  only  a  part 
of  the  funds  taken  from  the  tax-bearer  flows  into  the  treasury. 
For  both  of  them  enable  producers  who  escape,  or  whom  it  is  not 
intended  to  tax  (as  the  home  producer  in  the  case  of  a  tax  on 
imported  commodities),  to  collect  on  each  piece  of  goods  sold  a 
bounty  or  a  tax  in  the  form  of  a  price  higher  than  he  could 
otherwise  obtain,  the  amount  of  which  goes  into  his  own  pocket. 
Sometimes  this  subsidising  of  certain  producers  is  intentional, 
sometimes  only  accidental.     In  any  case  the  ultimate  effects 

'  The  discussion  here  is  confined  to  normal,  or  peace  times,  conditions,  in  order 
to  give  the  reader  a  view  of  the  more  permanent  principles.  War  taxation,  treated 
elsewhere,  is  distinctly  abnormal. 

134 


EXCISES  135 

which  will  result  from  such  an  interference  with  the  ordinary 
currents  of  trade  cannot  be  fully  traced.  It  is  comparatively 
seldom  that  excises  have  been  intentionally  used  to  change  the 
movement  of  economic  life.  But  customs  duties  have  regularly 
been  used  for  that  purpose.  Excises  have,  to  be  sure,  been 
used  to  influence  social  life,  to  lessen  the  consumption  of  certain 
commodities  the  use  of  which  is  regarded  as  injurious  to  the 
individual  or  dangerous  to  society,  but  the  object,  in  that  case, 
is  social,  not  economic. 

Direct  Consumption  Taxes.  —  There  used  to  be  a  large  num- 
ber of  the  so-called  direct  consumption  taxes.  A  few  of  these 
still  survive.  They  are  direct  in  the  first  sense  of  that  term, 
but  not  in  the  second.  These  direct  taxes  on  consumption  are 
either  remnants  of  the  older  taxes  on  movables,  or  arose  from 
the  attempt  to  frown  on  the  use  of  luxuries.  They  differ  from 
excises  in  that  they  are  levied  directly  on  the  consumer  and  not 
on  the  person  or  persons  who  supply  him  with  the  commodities. 
They  are  to-day  few  in  number  and  of  little  fiscal  importance. 
The  chief  instances  in  modern  times  and  the  most  universal  are 
the  dog  taxes.  There  are,  in  England,  similar  taxes  on  guns, 
carriages,  armorial  bearings,  and  men  servants.  In  the  United 
States  watches,  clocks,  and  firearms  have  been  made  contribu- 
tory in  this  way.  Plate,  houses,  clocks,  hair  powder,  and  a 
great  many  other  articles  have  been  taxed.  It  is  regarded  as 
just  and  proper  to  make  articles  of  luxury  the  subjects  of  taxa- 
tion because  their  use  is  supposed  to  be  evidence  of  ability  to 
pay.  The  tendency  now  is  to  leave  the  administration  of 
direct  consumption  taxes  to  the  local  bodies.  They  are  some- 
times combined  with  police  regulative  laws  and  are  assessed 
as  a  means  of  enforcing  those  ordinances.  This  is  the  case 
with  the  dog  tax  in  America. 

Sec.  2.  Some  Excises  Have  the  Same  Purpose  as  Sump- 
tuary Laws.  —  It  is  the  excise  tax  in  all  its  forms  that  has 
displaced  the  direct  consumption  taxes.  The  distinguishing 
feature  of  this  tax  is  that  some  resident  seller  of  an  article, 
whether  produced  in  the  country  or  abroad,  or  the  manufac- 
turer of  such  an  article,  advances  the  tax  either  during  the 


136  INTRODUCTION  TO  PUBLIC  FINANCE 

process  of  its  production  or  at  some  time  before  it  reaches  the 
consumer.  The  main  purpose  of  the  excise  is  to  obtain  revenue, 
but  the  ideas  underlying  the  sumptuary  laws,  and  the  desire 
to  use  taxation  as  a  means  of  social  and  moral  reform,  have 
dictated  some  of  these  taxes  or  at  least  the  selection  of  the 
commodities  to  be  taxed.  The  fact  that  the  consumption  of 
certain  articles  like  spirituous  liquors,  tobacco,  and  playing 
cards  is  condemned  in  itself,  and  that  such  articles  are  regarded 
as  unnecessary  luxuries,  has  led  governments  to  disregard,  or, 
indeed,  to  favour,  the  repressive  tendency  of  the  tax  upon  the 
use  of  them.  It  is  felt  that  in  case  the  tax  should  lessen  the  con- 
sumption, the  gain  to  the  community  in  moral  and  social  well- 
being  would  more  than  offset  the  loss  to  the  treasury  in  revenue. 
Moreover  the  consumption  of  such  articles  is  not,  it  has  been 
found,  liable  to  serious  diminution  on  account  of  the  tax,  unless, 
as  in  the  case  of  the  French  tax  on  tobacco,  it  is  very  high. 

A  System  of  Excise  Taxes.  — ■  In  the  seventeenth  century 
there  was  a  marked  tendency  to  multiply  excise  taxes.  So 
strong  did  this  tendency  become  that  not  a  few  able  writers 
advocated  a  general  excise  as  the  most  just  form  of  tax.^  Many 
of  the  recent  suggestions  for  the  reform  of  taxation  in  France 
are  in  the  same  direction.  This  tendency  can  be  easily  ex- 
plained by  the  rapid  multiplication  of  taxable  commodities. 
It  was  urged  that  the  ease  with  which  such  taxes  were  shifted 
insured  in  the  end  perfect  justice.  It  was  also  often  urged  that 
consumption  is  more  or  less  voluntary,  and  any  one  who  finds 
the  tax  too  heavy  can  avoid  it  or  lessen  it  by  curtailing  his 
consumption  of  the  taxed  article.  Thus  if  the  taxed  articles 
are  not  important  necessities,  the  contributor  has  a  certain 
control  over  his  share  of  the  tax  and  can  suit  it  to  his  means. 
If  the  tax  is  on  a  luxury,  he  has  presumably  absolute  control 
over  his  contribution.  But  modern  investigations  into  the 
character  of  distribution  and  consumption  would  seem  to  indi- 
cate that  these  views  are  erroneous.  There  is  no  doubt  that 
consumption  is  a  very  poor  criterion  of  taxpaying  ability. 
What  a  man  spends  is  no  indication  of  his  tax  faculty.     There 

1  Cf .  Cohn,  p.  336 ;  Seligman,  Shifting  and  Incidence,  p.  1 2  ff. 


EXCISES 


137 


are,  also,  some  important  administrative  difficulties.  The 
yield  of  these  taxes  is  beyond  the  control  of  the  fiscal  officers. 
If  more  revenues  are  needed,  it  is  not  always  possible  to  obtain 
them  by  raising  the  rates,  since  a  rise  in  the  rate  may,  in  fact, 
lessen  the  revenues  by  lessening  the  demand  for  the  articles. 
Therefore,  they  are  not  variable  at  the  pleasure  of  the  treasury. 
It  follows,  further,  that  a  system  of  excises  alone  would  be  ex- 
tremely inelastic.  But  as  parts  of  a  system,  the  elasticity  of 
which  is  provided  for  by  other  elements,  they  have  proved  very 
valuable  on  account  of  the  relative  ease  of  collection,  and  the 
large  returns  which  they  can  be  made  to  yield.  In  England, 
Russia,  and  France  the  returns  of  the  excises  and  customs  duties 
were  one-half  or  more  of  the  national  revenues.  In  Germany 
the  constitution  conferred  upon  the  imperial  legislature  the  power 
to  regulate  the  customs  and  excises  upon  domestic  productions 
of  salt,  tobacco,  spirituous  liquors,  beer,  sugar,  and  syrup. ^ 
The  commonwealths  of  the  Empire  did  not  levy  excises  on  the 
articles  above  mentioned  except  Bavaria,  Wiirttemberg,  and 
Baden.  The  Empire  could  not  tax  any  other  articles.  In  the 
United  States  the  federal  government  derived  nearly  half 
its  revenues  from  excises  and  an  almost  equal  amount  from 
customs. 

Principles  of  Excise  Taxation.  —  The  following  principles 
have  been  developed  as  governing  the  returns  obtainable  from 
excises:  (i)  Articles  which  are  regarded  as  necessaries,  and 
which  naturally  have  or  can  have  a  wide  consumption,  are  very 
suitable  under  this  tax  for  obtaining  large  revenues.  In  this 
case  the  operation  of  the  tax  is  like  that  of  a  poll  tax.  The  old 
French  gahellc,  a  tax  on  salt,  is  an  example.  The  effect  of  these 
taxes,  if  high,  is  possibly  to  curtail  consumption  and  possibly 
to  cause  a  substitution  of  other  similar  articles  not  taxed. 
Possibly,  too,  they  may  curtail  the  consumption  of  other  articles 
by  lessening  the  money  available  for  their  purchase.  But  even 
with  a  low  rate,  these  taxes  are  extremely  productive  of  revenue, 
on  account  of  the  large  number  of  contributors.  The  objec- 
tion to  burdening  necessaries  and  rendering  the  existence  of  the 

'  Burgess,  Political  Science,  II,  p.  174. 


138  INTRODUCTION  TO   PUBLIC  FINANCE 

poor  harder,  leads,  however,  sooner  or  later,  to  their  abolition 
or  to  a  reduction  in  their  rates.  These,  like  the  poll  taxes, 
recognise  to  too  small  an  extent  differences  in  ability.  They 
are,  however,  good  sources  of  revenue  in  cases  of  extreme  need. 
(2)  Luxuries  and  comforts  may  be  taxed  heavily.  This  applies 
especially  to  luxuries  the  use  of  which  has  become  a  fixed  habit 
with  large  masses  of  people.  The  general  principle  is  to  select 
those  luxuries  of  the  widest  consumption  as  the  objects  of  the 
heaviest  taxes.  Thus  alcoholic  liquors  and  tobacco  are  univer- 
sally taxed  in  this  way.  In  the  United  States  they  formed  al- 
most the  sole  objects.  In  times  of  special  need  it  is  customary  to 
press  the  semi-luxuries  or  comforts  into  service.  Here  again,  the 
choice  is  made  of  articles  of  widest  consumption ;  such  as  coffee, 
sugar,  silks,  chocolate,  etc.  In  most  modern  excise  systems, 
the  heaviest  burden  falls  upon  luxuries.  In  England,  where  the 
receipts  from  excises  were  nearly  one-fourth  of  the  total  revenues, 
the  chief  burden  fell  upon  spirits  (1908,  £22,830,000)  and  beer 
(1908,  £13,550,000).  In  France,  aside  from  the  octroi,  the 
chief  excises  are  on  beer,  wine,  spirits,  and  tobacco,  then  on 
sugar,  salt,  and  playing  cards.  In  Germany,  apart  from  the 
city  gate  taxes,  they  fall  upon  alcoholic  drinks,  tobacco,  and 
sugar.  Modern  excises  are,  then,  mainly  taxes  on  alcoholic 
drinks  and  tobacco  with  the  addition  of  a  few  other  duties  upon 
playing  cards,  etc.,  and  in  cases  of  great  need,  upon  a  few 
articles  of  large  consumption. 

Sec.  3.  Methods  of  Assessment.  —  By  far  the  most  inter- 
esting features  of  the  excises  are  the  methods  of  assessment  and 
collection.  These  are  practically  of  three  kinds,  which  may 
be  variously  combined:  (i)  A  tax  on  the  producer  or  seller  so 
levied  that  the  failure  to  pay  it  deprives  the  person  of  the  right 
to  sell,  and  renders  him  liable  to  penalty.  That  is,  a  so-called 
license  ^  is  sold.  (2)  An  impost  on  each  unit  of  the  article. 
This  demands  the  registration  of  the  dealers  therein ;  and  some- 
times they  are  required  to  give  bonds  as  surety  for  the  payment 

1  For  the  distinction  between  a  license  and  a  permit  see  the  United  States  Census 
Bureau  definitions,  Wealth,  Debt  and  Taxation,  1907,  Classification  of  Revenues. 
A  license  to  conduct  some  business  illegal  in  itself  differs  from  a  license  required 
merely  to  compel  the  payment  of  a  tax. 


EXCISES  139 

1 

of  the  tax.  Wherever  it  is  possible,  this  impost  is  collected  by 
means  of  the  sale  of  stamps  purchased  of  the  government  to  be 
affixed  to  each  package,  hogshead,  etc.,  or  by  means  of  brands, 
or  other  marks  affixed  by  officials  who  thus  receipt  for  the  pay- 
ment. The  stamp  or  brand  serves  as  evidence  that  the  tax  has 
been  paid.  Goods  not  bearing  these  would,  if  taxable,  become 
contraband  and  liable  to  seizure.  (3)  By  the  retention  of  the 
monopoly  of  manufacture  and  sale  by  the  government. 

England  and  America  use  a  combination  of  (i)  and  (2). 
Thus  in  England  every  barrel  of  beer  is  taxed  ys.  gd.  (1908) 
and  every  dealer  and  brewer  pays  a  license  besides.^ 

*  The  following  applies  to  1908  : 

Beer  Duty,  Excise 

.£    5.   d. 
Beer  of  specific  gravity  of  1055  degrees,  per  36  gal 079 

Annual  Licenses 

Brewers  of  beer  for  sale 100 

Other  brewers : 

Brewing  solely  for  their  own  domestic  use,  exempt  from  beer  duty,  if  the 
annual  value  of  the  house  occupied  does  not  exceed  £8        .  (exempt) 

Same,  if  annual  value  of  house  exceeds  £8,  but  does  not  exceed  £10  040 

Same,  if  annual  value  £10  to  £15    .          o     g     o 

Same,  but  Uable  also  to  beer  duty,  over  £15 040 

Same,  or  for  consumption  by  farm  labourers,  if  annual  value  of  house 

does  not  exceed  £10,  exempt  from  beer  duty           040 

Same  as  last,  if  over  £10,  liable  also  to  the  beer  duty 041 

Beer  dealers 360 

Beer  dealers,  additional  to  retail,  off  the  premises 150 

Beer  retailers,  on  the  premises 3  10    o 

Beer  retailers  "on,"  occasional  (license  per  day) 010 

Beer  retailers,  grocers,  "off,"  Scotland,  to  £10 2   10    o 

Beer  retailers,  grocers,  "off,"  Scotland,  £10  and  upward 440 

Beer  retailers,  grocers,  "off,"  England 150 

With  varying  and  additional  licenses  for  combination  of  sale  of  beer  with 
wine,  spirits,  etc. 
Spirits  are  taxed  in  a  similar  way  and  so  are  the  dealers  therein.     In  the  case  of 
tobacco  the  import  duty  forms  the  tax  on  the  commodity,  and  the  manufacturer 
pays  a  license  graded  according  to  the  size  of  his  business. 
Tobacco  manufacturers : 

£     J.    d. 

Under         20,000  lb S     5     o 

20,000  to    40,000  " 10  10    o 

40,000  "     60,000  " 15150 

60,000  "     80,000  " 2100 

80,000  "   100,000  " 26     5     o 

100,000 31   10     o 


I40  INTRODUCTION  TO  PUBLIC   FINANCE 

In  the  United  States  all  internal  revenue  taxes  are  payable 
by  stamps.  These  stamps  are  pasted  upon  the  packages  con- 
taining the  taxed  commodities  in  such  a  way  as  to  be  necessarily 
broken  when  the  package  is  opened.  Or  else  they  are  pasted 
up  or  exposed  in  the  places  of  business.  The  table  below  illus- 
trates the  whole  system. 

Schedule  of  articles  and  occupations  subject  to  tax  under  the  internal 
revenue  laws  of  the  United  States  in  force  August  28,  1894,  as  amended  to 
1908. 

Special  Taxes 

Rate  of  Tax 

Rectifiers  of  less  than  500  bbl.  a  year $100.00 

Rectifiers  of  500  bbl.  a  year,  or  more 200.00 

Retail  liquor  dealers 25.00 

Wholesale  liquor  dealers 100.00 

Retail  dealers  in  malt  liquors 20.00 

Wholesale  dealers  in  malt  liquors 50.00 

Manufacturers  of  stills 50.00 

And  for  stills  or  worms,  manufactured,  each 20.00 

Brewers,  annual  manufacture  less  than  500  bbl 50.00 

Brewers,  annual  manufacture  500  bbl.,  or  more 100.00 

Manufacturers  of  oleomargarine 600.00 

Retail  dealers  in  oleomargarine 48.00 

Wholesale  dealers  in  oleomargarine 480.00 

Distilled  Spirits,  Etc. 

Distilled  spirits  per  gallon $1.10 

Wines,  liquors,  or  compounds  known  or  denominated  as  wines,  and  made 
in  imitation  of  sparkling  wine  or  champagne,  but  not  made  from 
grapes  grown  in  the  United  States,  and  liquors,  not  made  from 
grapes,  currants,  rhubarb,  or  berries  grown  in  the  United  States,  but 
produced  by  being  rectified  or  mixed  with  distilled  spirits,  or  by 
the  infusion  of  any  matter  in  spirits  to  be  sold  as  wine,  or  as  a  sub- 
stitute for  wine,  in  bottles  containing  not  more  than  one  pint,  per 
bottle  or  package       10 

Same,  in  bottles  containing  more  than  one  pint,  and  not  more  than 
one  quart,  per  bottle  or  package 20 

And  at  the  same  rate  for  any  larger  quantity  of  such  merchandise, 
however  put  up,  or  whatever  may  be  the  package. 

Stamps  for  distilled  spirits  intended  for  export,  for  expense 10 

Tobacco  and  Snuff 

Tobacco  and  snuff,  however  prepared,  manufactured,  and  sold,  or 
removed  for  consumption  or  sale,  per  pound  12  cents,  or  with  dis- 
count of  20  per  cent $  -OQ^o  net 


EXCISES  141 

Qgars  and  Cigarettes 

Cigars  of  all  descriptions  made  of  tobacco  or  any  substitute  therefor, 
and  weighing  more  than  3  lb.  per  thousand,  per  thousand     .     .     .  $3.00 

The  same,  weighing  not  over  3  lb.  per  thousand,  per  thousand     ...       .54 

Cigarettes,  weighing  not  more  than  3  lb.  per  thousand  and  of  a  whole- 
sale value  or  price  of  more  than  $2  per  thousand,  36  cents  per  pound, 
or  per  thousand        1.08 

The  same  of  a  wholesale  value  or  price  of  not  more  than  $2  per  thousand, 
18  cents  per  pound,  or  per  thousand        54 

Cigarettes,  weighing  more  than  3  lb.  per  thousand,  per  thousand  .     .     3.60 

Fermented  Liquors 

Fermented  liquors,  per  barrel,  containing  not  more  than  31  gal.  .     .  $1.06 
More  than  i  bbl.  and  not  more  than  i  hogshead,  63  gal.,  in  one  pack- 
age     3.20 

Oleomargarine 

Domestic,  per  pound .    $  .02 

Imported,  per  pound 15 

Opium 
Prepared  smoking  opium,  per  pound $10.00 

Playing  Cards 
Playing  cards,  per  pack,  containing  not  more  than  54  cards  ....     $  .02 

Sec.  4.  Types  of  Excises.  —  We  may  now  look  at  a  few 
typical  excises.  The  taxation  of  salt  by  means  of  an  excise, 
collected  in  the  form  of  a  tax  on  producers,  a  tax  on  sellers,  the 
sale  of  a  monopoly  to  a  private  company,  or  state  manufacture, 
is  one  of  the  oldest  forms  of  taxation.  On  account  of  the  na- 
ture of  the  commodity,  a  necessity  for  which  there  is  no  sub- 
stitute, and  of  which  poor  and  rich  consume  about  the  same 
amount,  this  tax  acts  practically  as  a  poll  tax.  With  the 
modern  tendency  to  abolish  or  at  least  to  lower  poll  taxes,  as 
unequal  and  unjust,  the  salt  tax  has  been  largely  abolished,  or 
its  rates  have  been  so  lowered  as  to  practically  nullify  the  re- 
turns. France  in  1908  received  about  10,000,000  francs  from 
the  salt  excises.  The  English  salt  tax  yielded  at  the  time  of 
its  abolition  only  £380,000.  The  United  States  war  excise 
upon  salt  yielded  only  $300,000  (1899). 


142  INTRODUCTION  TO  PUBLIC  FINANCE 

The  best,  but  not  by  any  means  the  sole,  example  of  the  to- 
bacco monopoly  is  in  France.  This  interesting  tax  scheme  be- 
gan in  1674  under  Colbert,  It  continued  with  slight  interrup- 
tions for  over  a  century  as  one  of  the  most  productive  parts  of 
the  revenue  system.  It  was  leased  to  a  ferine  generate,  who 
paid  the  government,  at  the  time  of  Necker,  32,000,000  francs 
annually.  At  the  time  of  the  Revolution  the  monopoly  was 
abolished,  and  an  attempt  was  made  to  introduce  a  series  of 
taxes  on  tobacco.  But  the  monopoly  was  restored  in  18 10  by 
Napoleon  I,  and  has  continued  ever  since.  Under  the  present 
law  the  culture  of  the  plant  is  forbidden  outside  of  certain 
localities.  Each  year  the  estimated  amount  required  by  the  de- 
partment is  apportioned  among  the  different  applicants  within 
the  district  where  it  is  permitted  to  raise  tobacco.  Several 
thorough  official  inspections  of  the  fields  and  crops  are  made 
and  even  the  number  of  plants  and  leaves  is  counted  to  insure 
obedience  with  the  regulation  which  demands  the  delivery  of 
the  whole  crop  to  the  government.  Tobacco  raised  for  export 
is  similarly  watched  to  see  that  none  of  it  escapes  into  the 
channels  of  the  French  trade.  The  price  for  each  quality  is 
determined  by  a  commission  of  officials  and  experts.  A  part, 
about  one-half,  of  the  supply  is  imported.  The  manufacture 
is  carried  on  in  public  factories,  which  employ  about  20,000 
workmen.  The  sale  is  in  the  hands  of  some  40,000  petty 
officials,  who  receive  a  percentage  of  their  sales  and  whose 
appointment  is  a  part  of  the  party  spoils  system.  The  revenues 
obtained  in  this  way  are  enormous  : 

1815 40,000,000  francs. 

1869 197,000,000  " 

1872 218,700,000  " 

1876 262,300,000  " 

1880 284,000,000  " 

1885 300,000,000  " 

1890 373,000,000  " 

1895 381,000,000  " 

1900 415,000,000  " 

1904 447,000,000  " 

1908  with  matches 516,000,000  " 


EXCISES  143 

The  prices  charged  for  tobacco  are  high  compared  with  the 
prices  prevalent  in  other  countries,  so  high  that  the  consumption 
is  apparently  checked  thereby,  it  being  per  capita  less  than  one- 
half  that  of  Germany.  Austria  and  Italy  have  very  similar 
state  tobacco  monopolies.  France  added  a  monopoly  on 
matches  in  1890. 

Sec.  5.  The  Proper  Field  for  Excises.  —  On  account  of  the 
large  returns  obtainable  from  an  excise  on  luxuries,  and  in  view 
of  the  fact  that  any  repressive  effect  of  such  excises  is  not  felt 
to  be  harmful,  but  is  often  desired,  it  is  probable  that  these 
taxes  will  be  long  retained.  They  are  applicable  to  any  luxury 
the  consumption  of  which  is  large  and  of  which  the  production 
is  sufficiently  simple  or  concentrated  to  allow  of  supervision. 
But  in  general,  excises  as  taxes  on  expenditure  or  consumption 
are  unfair.  What  a  man  spends  is  no  indication  of  his  ability 
to  pay  taxes,  and  what  a  man  spends  on  a  certain  limited  list 
of  commodities  is  less  so.  When  these  taxes  are  made  a  sub- 
ordinate part  of  a  system  and  due  allowance  is  made  in  the  other 
taxes  for  the  existing  burdens,  there  is  less  objection  to  them. 


CHAPTER  VII 
CUSTOMS   DUTIES 

Section  i.  Customs  Duties  Defined.  —  Customs  duties  are 
taxes  levied  upon  commodities  when  they  cross  the  national 
boundary  line,  or  are  admitted  within  a  customs  territory, 
consisting  of  a  combination  of  countries  or  of  definitely  limited 
parts  of  countries.  Unless  a  city  or  town  forms  an  independent 
sovereignty,  taxes  levied  on  goods  entering  a  city  are  not  called 
customs  duties,  but  octrois  or  imposts,  and  partake  of  the  nature 
of  excises.  Duties  upon  goods  passing  from  province  to  prov- 
ince in  the  same  country  are  likewise  not  customs  duties ; 
neither  are  tolls  or  transit  duties  charged  upon  goods  passing 
through  the  country.  Such  charges  are  fees  for  the  ostensible 
or  real  service  of  the  government  in  keeping  up  roads  and 
bridges,  maintaining  peace,  and  allowing  transit.^  Customs 
duties  are  indirect  consumption  taxes  of  practically  the  same 
character  as  excises.  Their  treatment  in  a  separate  chapter 
is  not  on  account  of  any  actual  difference  in  nature  but  because 
of  their  historical  and  fiscal  importance. 

Sec.  2.  Old  Customs  Duties  Covered  Both  Imports  and 
Exports.  —  The  old  forms  of  customs  duties  were  on  exports 
and  imports  alike.  They  arose  by  analogy  from  the  transit 
tolls  which  were  customary  in  the  Middle  Ages.  Once  in  use 
their  fiscal  importance  was  recognised,  and  it  was  easy  from 
the  standpoint  of  feudal  politics  to  justify  their  continuance. 
Feudalism  regarded  every  act  of  the  vassal  as  the  concern  of 
the  lord.  If  any  vassal,  or  later  any  subject,  found  a  new 
means  of  gain,  feudalism  imposed  on   him  the  duty  of  con- 

'  Cf.  Bastable,  p.  552,  for  contrary  view.  Bastable  does  not  recognise  fees  as  a 
separate  class.    Hence  his  identification  of  transit  duties  witli  customs  duties. 

144 


CUSTOMS   DUTIES  145 

tributing  a  part  thereof  to  the  lord  or  the  king.  If  a  subject 
sold  a  commodity  to  a  foreigner  it  seemed  to  the  men  of  the 
Middle  Ages  that  the  king's  interests  were  affected,  and  it  seemed 
right  that  his  permission  should  be  paid  for.  The  export  duty 
is  often  a  sort  of  compromise  accepted  for  the  removal  of  the 
prohibition  of  exportation.  With  the  decay  of  the  older,  cruder, 
mercantile  ideas  and  the  advent  of  a  period  when  national 
wealth  came  clearly  to  depend  upon  the  size  of  national  trade 
more  than  on  its  direction,  export  duties  fell  away.  It  is  inter- 
esting to  note  in  this  connection  that  England  has  been  using, 
even  in  very  recent  years,  an  export  duty  on  coal,  originally 
for  the  protection  of  her  deposits  from  depletion.  In  1901  this 
duty  was  restored  in  order  to  obtain  revenues  for  war  purposes. 
The  yield  in  1905  reached  £2,500,000.  The  duty  was  repealed 
in  1906.  Turkey  and  India  are  now  the  only  countries  where 
export  duties  form  an  important  item  of  revenue.  India  is  the 
only  country  in  which  the  export  duties  exceed  the  import 
duties.'  In  Turkey  the  duty  is  i  per  cent  of  all  exported  com- 
modities. Switzerland,  Austria,  Russia,  and  Italy  have  a  few 
export  duties  upon  products  peculiar  to  their  soil,  the  burden 
of  which  is  supposed  to  fall  upon  the  foreigner.  France  did 
away  with  them  in  1881,  Germany  in  1873. 

Import  duties  are  still  very  numerous.  As  a  branch  of  the 
taxes  on  consumption,  their  yield  is  very  large.  The  German 
customs  duties  yielded  nearly  one-half  of  the  imperial  net  receipts. 
Until  recently  about  half  of  the  United  States  federal  income  was 
from  this  source ;  now  it  is  sHghtly  less  in  proportion.  The 
English  customs  duties  yield  about  23  per  cent  (1908)  of  the 
gross  receipts,  the  French  15  per  cent,  and  the  Itahan  the 
same. 

Sec.  3.  The  Purposes  of  Customs  Duties. — ^  Although  the 
fiscal  interests  are  great,  yet  in  every  important  country  except 
England  the  receipts  from  this  source  are  not  regarded  as  of  any 
greater  importance  than  the  effects  upon  the  industries  of  the 

'  Export  duties  are  still  levied  in  tlic  i'hilippincs  and  are  regarded  as  necessary  for 
the  taxation  of  the  industries  of  the  islands.  They  fall  on  sugar,  hemp,  and  tobacco 
principally. 


146  INTRODUCTION  TO  PUBLIC  FINANCE 

country.  There  are  then  two  sides  from  which  these  taxes 
must  be  studied :  (i)  from  the  side  of  the  revenue-yielding 
capacity;  (2)  from  the  side  of  the  "protection"  afforded  the 
industries  of  the  country  which  levies  them.  While  it  would  be 
undesirable  to  introduce  a  full  discussion  of  the  far-reaching 
economic  effects  of  protective  duties  upon  industries  and  com- 
merce in  a  treatise  on  finance,  yet  a  brief  statement  of  these 
effects  and  of  the  main  reasons  which  have  led  great  nations  to 
adopt  these  taxes  is  essential  to  an  understanding  of  their  nature. 
It  is  as  essential  to  know  how  and  why  protective  duties  are 
intended  to  alter  the  existing  economic  conditions,  as  it  is  to 
know  how  and  why  the  income  tax,  for  example,  is  supposed 
to  leave  them  unaltered. 

Sec.  4.  Protective  Tariff  Defined.  —  What  is  the  distinction 
between  a  protective  tariff  and  a  tariff  for  revenue  ?  It  may  be 
briefly  stated  as  follows :  a  protective  tariff  is  a  scale  of  duties 
so  arranged  as  to  prevent  importation,  wholly  or  in  part,  and  to 
raise  the  price  of  commodities  from  abroad,  the  production  of 
which  within  the  country  it  is  intended  to  encourage.  The 
scale  of  duties  is,  therefore,  arranged  with  a  view  to  the  sup- 
posed needs  of  the  industries  which  it  is  intended  to  develop. 
A  tariff  for  revenue,  on  the  other  hand,  aims  to  avoid  any  effect 
upon  industries  within  the  country,  and  the  duties  are  laid  ac- 
cording to  principles  similar  to  those  of  the  excise  upon  articles 
of  large  consumption  and  great  tax-bearing  capacity.  The 
term  "  a  tariff  for  revenue  o«/y,"  so  current  in  the  United  States, 
is  the  expression  of  an  unattainable  hope.  A  moment's  consid- 
eration of  the  law  of  international  exchange,^  namely,  that  the 
interchange  of  commodities  between  distant  places  is  deter- 
mined by  differences  in  their  possible  cost  of  production  in  the 
same  place,  and  not  by  their  absolute  cost  of  production  in  the 
separated  interchanging  places,  will  reveal  the  fact  that  even  a 
very  small  duty  upon  a  single  commodity  affects  the  demand 
of  the  country  from  which  that  commodity  comes  for  other 
things,  and  indirectly  affects  every  commodity  manufactured 
in  the  country  laying  the  tax.  The  same  is  true  of  an  excise. 
1  See  Mill,  Prm.,  Bk.  Ill,  Chap.  XVII. 


CUSTOMS  DUTIES  147 

In  fact,  any  consumption  tax  has  far-reaching  effects.  Strictly- 
speaking,  there  can  be  no  such  thing  as  a  tariff  for  revenue  only. 
What  is  meant  by  that  phrase  is  that  the  tariff  shall  be  so 
arranged  as  to  yield  the  needed  revenue  with  the  least  possible 
effect  on  the  trade  and  industry  of  the  country. 

It  must  be  noticed  that  every  tariff,  even  though  it  contains 
many  protective  features,  also  necessarily  contains  many  duties 
which  are  mainly  for  revenue.  Thus  in  the  United  States, 
even  with  high  protective  duties,  the  main  revenues  were  ob- 
tained from  the  taxes  upon  a  few  commodities.  The  receipts 
in  1888,  for  example,  were:  from  duties  on  sugar  and  the  like, 
$52,000,000;  from  wool  and  woollens,  $37,000,000;  from  iron 
and  steel,  $21,000,000;  these  three  together  being  more  than 
half  the  entire  receipts  from  customs  duties. 

Sec.  5.  Protection  as  a  National  Policy. — The  protective 
principle  is  widely  applied  in  every  important  existing  tariff  of 
customs  outside  of  England,  Holland,  Norway,  Belgium,  Swit- 
zerland, and  Denmark.  This  policy  is  clearly  the  outcome  of 
national  selfishness.  The  attempt  to  direct  industry  into  cer- 
tain lines  by  artificial  means  cannot  find  support  in  any  system 
of  political  economy  that  regards  the  largest  possible  world's 
product  as  the  proper  aim.i  The  object  is  rather  the  greatest 
possible  diversity  of  home  products.  In  so  far  as  this  purpose  is 
attained,  it  is  by  the  process  of  shutting  out  competition  and 
allowing  the  home  producer  to  collect  from  home  consumers 
a  certain  amount  of  support,  greater  or  less,  according  to  the 
supposed  needs  of  the  producer  in  question.  In  so  far,  then, 
the  actual  protection  afforded  is  an  item  of  public  expenditure. 
Revenues  collected  by  means  of  higher  prices  authorised  by  law 
are  spent  in  developing  the  industry  protected.  It  is  in  every 
respect  the  same  as  if  a  subsidy  were  paid  to  the  manufacturer 

'  See  the  article  by  Professor  FolwcU  on  "Protective  Tariffs  as  a  Question  of 
National  Economy,"  in  The  National  Revenues,  a  collection  of  papers  by  American 
economists,  edited  by  Albert  Shaw,  Chicago,  1S88.  Contrary  to  the  popular  opinion 
as  to  the  views  of  economists,  none  of  the  writers  who  have  contributerl  to  this 
symposium  finds  it  possible  to  attack  protection  on  n  priori  grounds.  On  the  free- 
trade  side  see  Report  of  the  Proceedings  of  the  International  Free-trade  Congress, 
London,  August,  1908.  Cobden  Club,  Caxton  House,  Westminster,  S.  S.,  London, 
1908. 


148  INTRODUCTION  TO  PUBLIC   FINANCE 

or  other  producer,  except  that  the  money  goes  directly  to  him 
without  first  passing  through  the  treasury. 1 

Sec.  6.     A  High  Protective  Tariff  Yields  Little  Revenue.  — 
We  turn  now  to  a  treatment  of  the  fiscal  character  of  protec- 
tive duties :   (i)  In  the  first  place,  it  is  clear  that  the  more  "  pro- 
tection "  the  duty  gives,  the  less  will  be  the  revenues  afforded 
to  the  government,  and  the  greater  the  possible  revenues  to  the 
subsidised  producer.     Absolute  protection  means  the  exclusion 
of  the  foreign  commodity  and  no  revenue  to  the  government. 
The   subsidy    that    the   producer    can    obtain    is    determined 
by  the  conditions  of  production ;    it  varies  from  nothing   to 
the  whole  amount  of  the  tax  according  as  the    cost  of   pro- 
duction varies  above  what  the  cost  of  the  imported  commodity 
would  be  without  the  duty.     (2)  Above  a  certain  point  high 
duties  tend  to  diminish  the  revenues  to  the  government,  and 
increase  the  subsidy  to  the  producer,  by  diminishing  the  amount 
of  the  commodity  imported.     The  point  beyond  which  the  total 
revenues  diminish  is  ascertainable  by  a  principle  similar  to 
that  of  charging  what  the  traffic  will  bear.     In  practice  that 
point  can  be  ascertained  by  gradually  increasing  the  duty  until 
it  is  found  that  the  importation  begins  to  diminish,  and  stopping 
the  increase  of  the  duty  when  it  is  found  that  the  added  duty 
checks  more  of  the  importation  than  the  increased  duty  com- 
pensates for.     A  tariff  of  customs  duties  arranged  throughout 
on  this  principle  would  be  a  revenue  tariff,  and  if  universal, 
would  yield  enormous  sums.     It  would,   also,  contain  many 
protective  features.     The  burden  of  such  a  tax  would  be  in- 
sufferable.    No   such   general    tariff  has   ever  been   enforced. 
(3)   Protection  is  given  only  when  the  price  is  raised.     The 
subsidy  paid  to  the  producer  is  paid  by  the  consumers  within 
the  country.     This  part  of  the  tax  is  never  shifted  to  foreigners 
and  generally  remains  on  the  consumer.     (4)   But  that  part 
of  the  tax  which  flows  into  the  treasury  of  the  government  is 
not  always,  although  generally,  paid  by  the  consumer,  whether 
protection  is  afforded  thereby  or  not.     There  are  a  few  rare 
instances  in  which  the  tax  that  forms  a  part  of  the  government's 

1  See  above  on  expenditure  for  protection  of  industry. 


CUSTOMS   DUTIES  149 

revenue  is  shifted  either  to  the  foreigner,  i.e.  the  producer,  or 
the  speculator,  i.e.  the  importer.  These  instructive  instances 
may  be  summed  up  as  follows :  The  consumer  escapes  that 
part  of  the  tax  which  flows  into  the  treasury  on  purchases  of 
commodities  actually  imported :  (a)  When  the  amount  of 
the  commodity  produced  in  the  country  laying  the  tax  is  suffi- 
cient in  quality  to  entirely  supply  the  home  market  and  to  fix 
the  price  very  close  to  the  cost  of  production,  while  the  foreigner 
has  at  the  same  time  so  large  a  supply  that  he  must  enter  that 
market  to  dispose  of  it.  In  this  case,  if  any  revenue  at  all 
accrues  to  the  government,  it  is  clear  that  it  is  paid  by  the 
foreigner,  who  is  burdened  by  the  whole  tax  and  may  lose  more, 
—  more,  that  is,  if  his  entrance  into  the  market  still  further  de- 
presses the  price.  The  home  producer  gets  no  subsidy.  A 
commonly  cited  example  of  this  is  the  case  of  rye  in  Germany 
in  good  years  when  the  outside  crop  is  also  good,  {b)  When  a 
new  tax  is  laid  on  goods  produced  b}'  the  aid  of  a  large  fixed 
plant  for  a  limited  market  which  would  be  lost  if  the  price  were 
raised.  As  long  as  the  producer  is  unable  to  change  the  nature 
of  the^ plant,  he  must  pay  the  tax.  An  example  was  found  in 
the  iron  products  from  the  Rhine  districts  prepared  for  the 
trade  as  "  Sheffield  "  cutlery.  England  could  in  this  case 
tax  the  foreigner  until  such  time  as  he  could  change  the  char- 
acter of  his  product,  (c)  In  the  case  of  commodities  that  are 
used  only  as  the  substitutes  for  something  else  because  cheaper, 
and  which  would  not,  if  the  price  rose  higher  than  that  of  the 
commodity  for  which  they  are  used,  be  consumed  at  all.  In 
this  case  the  foreigner  pays  a  part  or  the  whole  of  the  tax  when 
the  alternate  commodity  is  cheap.  For  example,  rye  in  Ger- 
many when  wheat  is  cheap,  especially  if  at  the  same  time  the 
crop  of  rye  is  short,  {d)  In  the  case  of  commodities  a  large 
part  of  whose  total  consumption  is  produced  in  the  country, 
but  not  enough  to  absolutely  fix  the  price,  which  is  still  above 
the  cost  of  production.  The  foreigner  in  that  case  may  pay 
part  of  the  tax,  since  his  arrival  depresses  the  price,  {e)  The 
speculator  regularly  pays  the  tax  in  those  frequently  recurring 
instances  when  the  commodilv  is  massed  in  warehouses  on  the 


150  INTRODUCTION  TO  PUBLIC   FINANCE 

border  ready  for  importation  on  a  rise  in  the  price  and  on  being 
imported,  at  the  order  of  various  speculators,  in  large  masses 
depresses  prices  again.  It  is  a  pretty  well-established  fact, 
from  the  investigations  of  Cohn  and  Kandtorowicz,  that  the 
speculators  on  the  Exchange  as  a  whole  lose  more  than  the)'' 
gain.  This  loss  is  in  part  the  consumer's  gain  through  the  relief 
from  taxation.^ 

Sec.  7.  Specific  and  Ad  Valorem  Duties.  • —  Customs  duties 
regarded  merely  as  a  source  of  revenue  depend  upon  the  same 
principles  exactly  as  those  which  underlie  excises  used  for  that 
purpose.  The  greater  revenue  is  obtained  with  the  least 
expense  from  a  few  simple  duties  upon  important  commodities. 

Technically,  customs  duties  are  of  two  kinds,  according  as 
they  are  levied  upon  goods  in  bulk  irrespective  of  their  value,  or 
the  contrary.  This  technical  distinction  is  of  great  importance 
in  determining  the  incidence  of  these  taxes.  Duties  levied 
according  to  the  value  of  the  imported  commodities  are  known 
as  ad  valorem;  those  according  to  weight,  bulk,  or  other  unit  of 
measurement  are  known  as  specific.  The  latter  usually  fall 
most  heavily  upon  the  coarser  or  cheaper  grades  of  commodities. 
Such  a  tariff  is,  therefore,  regressive  and  contrary  to  the  spirit 
of  many  consumption  tax  systems,  which  usually  tax  luxuries 
more  heavily  than  other  commodities.  But  the  great  saving  in 
expense,  and  the  great  ease  of  collecting  and  administering 
specific  duties,  go  a  long  way  in  recommending  them.  Ad 
valorem  duties  demand  more  machinery  of  administration,  as, 
for  example,  the  certification  of  the  consul  in  the  place  where  the 
goods  come  from  to  the  correctness  of  the  invoice,  a  corps  of 
appraisers,  and  a  careful  examination  or  inspection  of  all  in- 
coming goods.  Little  of  this  is  necessary  in  the  case  of  specific 
duties.  Specific  duties  are  now  retained  mainly  for  simple 
commodities  of  uniform  value  per  unit,  or  for  rough  groups  of 
articles,  whose  value  is  easily  ascertained. 

*  See  the  masterly  treatment  of  the  whole  of  this  intricate  subject  by  Lexis, 
"Handel,"  in  Schmibcrg's  Handhuch,  2d  ed.,  Vol.  Ill,  XXI,  sec.  77;  also  Conrad, 
in  his  Jahrbuch,  XXXVII;  Cohn,  "  Zeitgeschiif te  und  DiSerenzgeschiifte,"  in 
Hildebrand's  Jahrbuch,  Yll,  p.  388;  brought  down  to  date  in  i8go  by  Kandtoro- 
wicz. 


CUSTOMS  DUTIES 


151 


Smuggling.  —  The  watching  of  the  frontier  and  the  preven- 
tion of  smuggUng  is  one  of  the  primary  difficulties  that  have 
to  be  overcome  in  the  administration  of  customs  duties.  Goods 
of  high  value  and  easily  portable  are  not  very  well  adapted  to 
pay  such  duties,  unless  they  can  be  obtained  only  from  distant 
countries  and  are  thus  easy  of  identification.  Whenever  there 
is  a  heavy  excise  on  any  commodity  there  is  generally  a  corre- 
spondingly heavy  customs  dut}^  as  well.  Sometimes  the  im- 
ported commodity  pays  both  the  dut}-  and  the  excise  or  a  part 
of  the  excise. 

The  political  or  protective  element  in  customs  duties  has  been 
gradually  retreating  in  importance,  and  the  fiscal  has  corre- 
spondingly advanced.  Stein  ^  makes  this  the  sole  law  in  the 
history  of  customs  duties.  It  would  be  best  characterized  as  an 
advance  of  the  fiscal  interest,  leaving  the  political  or  protective 
interests  the  same  as  before.  The  pressing  wants  of  nations, 
and  the  fact  that  federal  governments  have  been  well-nigh  con- 
fined to  these  taxes,  have  necessitated  this  advance. 

Sec.  8.  History  of  Customs  Duties  in  England.  —  We  may 
now  look  at  some  examples  of  customs  duties.  Those  of  Eng- 
land are  particularly  instructive.^  The  term  "  consuetudines,'^ 
or  customs,  applied  to  the  duties  levied  upon  imported  and  ex- 
ported commodities  even  before  the  Magna  Charta,  bespeaks 
their  antiquity.  In  the  time  of  the  Norman  kings,  however, 
trade  was  insignificant  and  the  duties  not  very  productive. 
The  original  duty  on  wine  was  one  cask  from  every  cargo  of 
between  ten  and  twenty  casks,  two  from  twenty  or  more.  What 
the  original  duty  on  wool  was  is  not  known.  Finally  the  sys- 
tem settled  down  to  a  5  per  cent  tax  on  all  imports  and  exports. 
Down  to  1700  these  duties  were  entirely  for  revenue  purposes 
and  had  no  intentional  protective  features.  At  one  time  their 
yield  was  nearly  £i,5oo,cx)0.  The  eighteenth  century  saw  a 
changed  policy.  Special  protective  and  prohibitive  duties 
were  established.  This  was  the  policy  of  the  entire  century, 
except  during  the  "long  peace"  of  Walpole,  1722-1739.     By 

'  Vol.  ir.  Part  II,  p.  377. 

^  See  Hall,  History  of  the  Customs  Revenue,  and  Dowell,  History  of  Taxations 


152  INTRODUCTION  TO  PUBLIC   FINANCE 

1759  the  general  charges  were  25  per  cent,  while  many  com- 
modities, like  tea,  coffee,  sugar,  wines,  and  spirits,  paid  even 
more.  The  expenses  of  the  wars  which  marked  the  turn  of 
the  century  led  to  a  general  increase  of  charges  on  revenue- 
yielding  commodities.  Yet  with  all  the  many  increases  in  the 
tax  charges  there  was  not  a  corresponding  increase  in  revenues. 
In  some  cases  the  high  duties  of  the  war  period  exceeded  the 
limit  of  what  the  goods  would  bear.  For  example,  sugar  paid 
duties  ranging  from  205.  to  395.  per  hundredweight  during  the 
first  fifteen  years  of  the  nineteenth  century.  But  the  annual 
income  was  least  when  the  duties  were  highest.  Consumption 
fell  off  half  a  million  hundredweight  under  the  higher  price.  It 
must  be  noted  that  this  result  was  obtained  in  the  case  of  a  com- 
modity not  produced  in  the  country  itself.  Salt,  also,  bore  a 
heavy  duty  in  this  period  to  the  lessening  of  the  consumption. 
Tea,  coffee,  tobacco,  wine,  and  other  foreign  products  were 
also  subject  to  revenue  duties  so  high  as  to  be  close  to,  if  not  be- 
yond, the  limit  of  greatest  productivity. 

Interesting  and  instructive  is  the  experience  of  England  with 
protective  duties.  Export  duties  on  raw  material,  or  the  pro- 
hibition of  the  exportation  thereof,  as  in  the  case  of  wool,  was 
originally  one  of  the  most  prominent  features  of  the  English 
system.  From  the  middle  of  the  seventeenth  century  down  to 
1825  the  exportation  of  home-grown  wool  was  forbidden.  Until 
1802,  however,  the  importation  of  wool  was  free.  Then  the 
import  duty  rose  rapidly  from  55.  3J.  per  hundredweight,  in 
1802,  to  565.  per  hundredweight  in  1819.  To  encourage  the 
production  of  raw  silk,  heavy  duties  were  placed  upon  that  com- 
modity in  1765,  and  not  lessened  until  1825.  Linen  manufac- 
ture was  encouraged  by  bounties. 

The  chief  battles  over  the  customs  duties  in  England  were 
waged  around  the  "  corn-law."  ^  Two  things  among  others 
of  minor  importance  seem  to  have  contributed  mainly  to  the 
establishment    of    protective    duties    on    bread-stuffs.^    The 

^The  American  student  must  bear  in  mind  that  in  England  "corn"  means 
wheat,  or,  in  general,  bread-stuffs. 

2  See  McCuUoch,  Taxation,  p.  206 ;  Wilson,  National  Budget,  p.  62  ff. ;  Levy, 
History  of  British  Cot/merce,  2d  ed.,  Part  II,  Chap.  7  ;  Rand,  p.  207  ff. 


CUSTOMS  DUTIES  1 53 

first  was  the  existence  of  heav}'^  public  burdens  upon  land,  and 
the  desire  to  compensate  land  owners  and  land  users  therefor. 
The  other  was  the  desire  to  make  England  as  independent  as 
possible  of  all  foreign  nations  for  her  food  supply,  and  to  keep 
even  the  poorer  lands  in  cultivation.  According  to  the  advo- 
cates of  this  policy,  protection  was  needed  to  enable  the  pro- 
prietors and  tenants  to  buy  manufactured  products.  It  was 
the  political  power  of  the  proprietors  that  enabled  the  policy 
to  be  maintained.  The  various  tariffs  that  prevailed  may  be 
conveniently  summarised  as  intended  generally  to  maintain 
a  chosen  price,  which  it  was  assumed  would  enable  the  producer 
to  live,  and  would  not  place  too  heavy  a  burden  on  the  con- 
sumer. Hence  the  frequent  recourse  to  a  sliding  scale  by  which 
a  higher  duty  was  imposed  as  the  price  fell.  The  best  example 
is  the  scale  adopted  by  Sir  Robert  Peel  (5  and  6  Vict.  c.  14),  by 
which  the  duty  was  to  be  205.  per  quarter  when  the  price  was 
50^.  and  515.,  and  decreased  is.  per  quarter  for  every  rise  of 
15.  in  price ;  so  that  the  duty  would  only  be  is.  per  quarter 
when  the  price  rose  to  jos.  and  over.  The  idea  was,  clearly,  to 
maintain,  if  possible,  a  price  of  at  least  705.  A  similar  purpose 
underlay  the  earlier  prohibition  of  importation,  until  the  price 
rose  above  805.  per  quarter. 

Popular  agitation,  headed  by  the  Anti-Corn  Law  League,  was 
based  upon  the  hope  of  cheaper  food  supplies.  It  was  sup- 
ported by  the  rapidly  growing  manufacturing  interests  in  the 
expectation  that  cheaper  food  would  result  in  a  fall  in  wages. 
After  years  of  effort  it  brought  about  the  repeal  of  the  corn  laws 
in  1846.  The  sympathy  aroused  by  the  Irish  famine  of  the 
same  year  contributed  to  this  end.  Just  before  the  repeal  of 
the  corn  laws  Peel  had,  in  1842,  simplified  the  whole  tariff  by 
eliminating  many  of  the  protective  features,  especially  by  re- 
moving duties  on  raw  material  and  freeing  a  number  of  small 
articles.  As  a  substitute  source  of  revenue  the  income  tax 
was  restored.  Gladstone,  in  i860,  completed  the  removal  of 
protective  features.  Since  that  time  it  has  been  true,  in  the 
words  of  Bastable,  that  "  the  English  customs  system  is  remark- 
able for  its  vigorous  adherence  to  the  principle  of  purely  financial 


154  INTRODUCTION  TO  PUBLIC  FINANCE 

duties.  All  traces  of  a  political  aim  in  the  imposition  of  customs 
duties  have  now  disappeared."  The  corn  duty  was,  however, 
restored  as  a  revenue  measure  at  the  time  of  the  Boer  War. 
It  lasted  but  a  short  time,  namely,  from  April  15,  1902,  to  July 
I,  1903,  and  during  that  time  yielded  £2,448,000.^ 

During  the  fiscal  year  1 907-1 908  the  customs  yielded 
£32,500,000  as  follows  :  tobacco,  £13,739,000 ;  tea,  £5,807,000  ; 
coffee,  £184,000;  cocoa,  etc.,  £287,000;  chicory,  £47,000; 
currants,  raisins,  and  other  dried  fruits,  £456,000;  sugar, 
£6,708,000;  beer,  £23,000;  spirits,  £4,133,000;  wine,  £1,177,- 
000.  The  Great  War  brought  many  changes  in  English  customs 
duties.  They  may  not  be  permanent.  Mention  of  them  will 
be  found  in  the  chapter  on  War  Finance. 

Sec.  9.  The  German  Customs  Union.  —  The  difi&culty  of 
administering  customs  duties  in  the  small  and  scattered  areas 
of  the  different  States  of  Germany  led  to  the  formation  of  the 
German  customs  union  (Zollverein)  in  1833.  This  union,  which 
at  first  embraced  a  population  of  25,000,000  and  a  territory  of 
80,600  square  miles,  grew  in  size  and  in  permanence  with  the 
renewal,  from  time  to  time,  of  the  treaties  which  bound  to- 
gether the  States  composing  it,  and  with  the  entrance  of  new 
States,  so  that  in  1854  it  embraced  98,000  square  miles  and 
35,000,000  inhabitants.  It  was  the  core  of  the  recent  German 
Empire.  At  the  beginning  the  moderate,  mainly  revenue, 
duties  of  Prussia  were  adopted.  In  the  tariff  of  1865  the  rates 
were  lowered  and  many  removed.  Duties  on  grain  and  on 
almost  all  raw  materials  were  removed,  and  the  duties  on  manu- 
factured goods  reduced.  The  free-trade  tendency  which  accom- 
plished this  change  lasted  until  long  after  the  formation  of  the 
Empire,  indeed  down  to  1877. 

The  constitution  of  the  Empire  conferred  upon  the  imperial 
legislature  the  exclusive  power  to  regulate  customs.  It  might 
levy  taxes  to  any  amount  upon  all  articles  exported  or  im- 
ported, for  revenue  purposes  or  for  protection  or  for  both.  But 
the  imperial  legislature  could  not  tax  anything  else.     Further 

1  The  so-called  "registration"  duty,  1869-1870,  yielded  £1,000,000  during  the 
entire  period  of  its  existence. 


CUSTOMS   DUTIES  1 55 

revenues,  if  needed,  could  be  raised  in  the  form  of  an  appor- 
tioned requisition  upon  the  commonwealths  of  the  Empire. 
The  growing  need  of  the  Empire  for  revenues  was  accompanied 
by  a  wave  of  protectionist  sentiment,  so  that  the  increased  duties 
were  more  and  more  protective  in  character.  It  is  true,  however, 
that  the  revenue  features  were  increased  at  the  same  time. 

Particularly  interesting  was  the  duty  on  grain,  introduced  in 
1879,  and  raised  several  times  afterward.  The  rate  became 
5  M.  per  100  kilograms  for  wheat  and  rye,  4  M.  for  oats, 
2 J  M.  for  barley.  These  duties  were  in  some  measure  pro- 
tective in  ordinary  seasons.  It  was  frequently  found  that  a 
part  of  the  revenue  which  flowed  into  the  treasury  from  this 
source,  especially  in  extraordinary  years,  was  paid  by  others 
than  the  consumer.^  Generally,  however,  the  consumers  paid 
the  home  producers  a  goodly  sum  in  the  shape  of  higher  prices. 
The  operation  of  these  grain  duties  has  been  materially  modified 
in  recent  years  by  the  conclusion  of  commercial  treaties  with 
some  of  the  grain-producing  countries.  The  main  revenues 
from  customs  duties  in  the  Empire  came  from  coffee,  tobacco, 
wine,  and  grain. 

Sec.  10.  History  of  the  French  Tariff.  —  France  has  a  highly 
developed  system  of  customs  duties.  By  the  edict  of  1664  Col- 
bert attempted  to  reduce  to  a  single  uniform  scheme  all  the 
confused  and  multifarious  customs  charges  that  had  come  down 
from  feudal  times  and  were  in  the  hands  of  many  different 
authorities.  The  tariff  thus  established  was  protective  in 
character  and  was  dictated  mainly  by  the  mercantile  doctrine. 
But  many  provincial  duties  were  left,  and  as  time  went  on  con- 
fusion increased.  The  Revolution  swept  all  the  old  taxes  away, 
and  in  1791  the  system  which  is  the  basis  of  the  present  one  was 
estabUshed. 

The  development  since  then  has  been  gradual.  Prohibi- 
tions of  imports  and  exports,  so  numerous  in  the  tariffs  of  the 
ancient  monarchy,  have  now  all  been  removed.  Since  1863  the 
only  exceptions  to  this  statement  are  books  that  infringe  the 
copyright  law  and  munitions  of  war.  To  insure  the  proper 
*  See  example  cited  above ;  also  Cohn,  p.  565  ff. 


IS6  INTRODUCTION  TO  PUBLIC  FINANCE 

registration,  for  statistical  research,  of  all  traffic,  there  used 
to  be  an  import  charge  on  all  goods  of  15  centimes  per  100 
francs'  worth  or  50  centimes  per  100  kilograms,  and  an  export 
charge  of  25  centimes  per  100  kilograms.  These  have  been 
removed.^ 

During  the  period  subsequent  to  the  Revolution,  and  down  to 
1814,  war  measures  left  no  opportunity  to  test  the  tariff  of  1791. 
The  Restoration  established  a  highly  protective  system  at  the 
instigation  of  the  Chambers.  The  Second  Republic  continued 
the  same  policy.  Napoleon  III,  finding  himself  unable  to 
persuade  the  deputies  to  change  the  tariff,  removed  many  of 
the  prohibitive  duties  by  treaties.  The  first  of  these  treaties, 
with  England  in  i860,  fixed  the  maximum  ad  valorem  duty  on 
English  goods  at  30  per  cent  for  the  first  four  years  and  25  per 
cent  after  that.  Other  treaties  followed,  extending  similar 
privileges  to  other  countries.  In  the  spirit  of  these  treaties  the 
tariff  itself  underwent  many  amendments,  raw  products  were 
admitted  free,  duties  on  foods  were  removed  or  lowered,  and  the 
duties  protecting  the  stronger  manufactures  were  lowered. 
By  1873,  that  is,  after  the  struggle  with  Germany  was  over, 
and  after  the  revenue  system  had  been  rearranged  to  meet 
the  tremendous  burden  which  was  the  consequence  of  the  war, 
France  had  two  distinct  tariffs.  First,  the  general  tariff  built 
upon  the  law  of  1791  amended  many  times.  Second,  a  conven- 
tional tariff  based  upon  treaties.  Since  these  treaties  generally 
contained  the  clause  granting  each  nation  the  same  privileges 
as  the  most  favoured,  this  tariff  was  more  uniform  than  the 
method  of  construction  would  lead  one  to  expect.  In  1881  the 
general  tariff  was  pretty  thoroughly  revised  so  as  to  approach 
the  treaty  tariff.  Manufactures  were  slightly  protected.  With 
this  as  a  starting-point  new  treaties  were  made. 

One  of  the  most  remarkable  reforms  that  any  tariff  has  ever 
undergone  was  accomplished  in  1892.  This  was  the  passage  of 
two  tariffs  in  a  single  law.  There  was  first  a  general  tariff 
or  maximum  which  was  to  be  levied  on  goods  from  all  countries 

'On  the  whole  subject  see  Levasseur,  "Recent  Commercial  Policy  of  France," 
Journal  oj  Political  Economy,  Vol  i,  No.  i,  December,  i8g2. 


CUSTOMS  DUTIES  157 

not  obtaining  special  privileges  by  treaties.  Second,  a  minimum 
tarifif  marking  the  lower  limit  to  which  the  concessions  might  go. 
The  latter  was  to  be  applied  to  the  native  products  of  those 
countries  which  grant  French  products  reciprocal  privileges. 
Both  of  these  tariffs  were  protective.  There  are  over  700  items 
in  the  maximum  tariff,  but  the  number  on  which  concessions 
could  be  made  was  considerably  less. 

Sec.  II.  The  United  States.  —  The  tariff  history  of  the 
United  States  has  been  written  many  times. ^  Its  effects  have 
been  explained  in  many  different  ways.  Not  one  of  the  many 
histories  is  clearer  and  more  impartial  than  the  short  state- 
ment by  Professors  Seligman  and  R.  Mayo  Smith,  printed  (in 
English)  in  the  publications  of  the  Verein  fiir  Socialpolilik, 
1892  (Vol.  XLIX,  Part  i).  Nothing  but  the  barest  outlines 
can  be  attempted  here. 

The  colonial  policy  of  England  prohibited  the  exportation 
of  the  more  important  commodities,  the  "  enumerated  "  articles, 
to  any  country  but  England.  Importation  was  to  take  place 
only  from  British  ships.  As  was  seen  in  the  chapter  on  protec- 
tive expenditure,  bounties  were  paid  to  encourage  agricultural 
products.  The  only  import  duty  in  the  colonies  was  that  im- 
posed in  1773  on  rum,  molasses,  and  sugar  from  other  than 
British  colonies. 

After  the  War  of  Independence  there  was  a  movement  to 
protect  the  new  industries  which  had  sprung  up.  As  Congress 
did  not,  until  the  adoption  of  the  new  constitution  in  1789, 
have  the  power  to  collect  duties,  the  commonwealths  tried  to 
afford  the  desired  protection.  There  is  naught  but  confusion 
in  these  efforts,  all  of  which,  however,  came  to  an  end  when  the 
commonwealths  were  forbidden  to  levy  customs  duties. 

The  tariff  was  the  sole  source  of  tax  revenue  which  the  new 
federal  government  had.  It  was,  consequently,  largely  utilised 
from  the  first.  Down  to  the  close  of  the  War  of  181 2  the 
tariffs  were,  in  effect,  if  not  in  intention,  revenue  and  not  pro- 
tective tariffs.    The  rates  were  generally  low,  except  on  purely 

'  Sumner,  History  of  Protection  in  the  United  States;  Taussig,  TariJJ  History  of  the 
United  States. 


158  INTRODUCTION  TO   PUBLIC   FINANCE 

revenue  articles  like  sugar,  tea,  coffee,  and  wine.  The  Orders 
in  Council,  the  Berlin  and  Milan  decrees,  on  the  east  side  of  the 
Atlantic,  and  the  Embargo  and  Non-Intercourse  acts,  on  the 
west  side,  followed  by  the  War  of  181 2,  gave  absolute  protection 
to  American  industries  and  seriously  lessened  the  growth  of  the 
customs  revenue  of  the  government  for  a  period  of  seven  years. 
It  is  not  surprising,  therefore,  to  find  the  new  industries  which 
had  been  forced  into  existence  during  that  time  calHng  loudly 
for  protection  after  the  peace.  A  strong  protectionist  senti- 
ment arose  which  initiated  a  policy  that  had  scarcely  more  than  a 
temporary  setback  from  1 816  to  1895.  That  pohcy  was  to  com- 
bine high  protective  duties  with  important  revenue  duties. 
The  main  arguments  advanced  for  and  against  the  policy  of 
protection  have  been  stated  under  Expenditure.  The  industries 
protected  were  the  textiles,  cotton  and  wool,  and  iron.  Among 
the  revenue  duties  may  be  named  those  on  tea,  coffee,  and  wine, 
and  perhaps  those  on  sugar  and  tobacco.  The  first  period  of 
the  protective  policy  passed  the  highwater  mark  in  1828. 

The  only  important  setback  which  the  policy  sustained  before 
the  recent  tariffs  was  in  the  so-called  free-trade  period  from  1846 
to  i860.  The  act  of  1846  was  heralded  as  a  tariff  for  revenue 
only,  but  it  was  still  highly  protective.  The  duties  on  the 
classified  commodities  ranged  from  5  per  cent  to  100  per  cent; 
the  last  on  spirits.  Some  purely  revenue  duties  were  removed 
entirely,  as,  for  example,  the  duty  on  tea  and  coffee.  The 
protective  textile  industries  retained  their  duties  for  the  most 
part ;  woollens  20  to  30  per  cent,  cottons  the  same,  iron  30  per 
cent.  All  the  duties  were  made  ad  valorem,  a  change  which 
involved  an  increase  in  the  cost  of  administration.  A  more 
substantial  reduction  was  made  in  1857. 

The  crisis  of  1857  resulted  in  a  serious  decline  in  the  revenues, 
and  just  before  the  Civil  War  broke  out,  Congress  passed  the 
so-called  Morrill  tariff,  March  2,  1861.  This  tariff  increased 
the  protective  duties,  especially  on  iron  and  woollens.  From  the 
technical  side  this  act  made  two  changes  of  note.  First,  specific 
duties  were  again  restored ;  second,  the  system  of  so-called 
compensating  duties  was  initiated.     This  second  feature,  which 


CUSTOMS   DUTIES  159 

afterwards  received  a  very  broad  application,  can  best  be  made 
clear  by  an  illustration.  The  Morrill  tariff  increased  the  duty 
on  raw  wool.  To  compensate  the  manufacturers  for  this,  a 
specific  duty,  supposed  to  represent  the  duty  on  raw  materials, 
was  placed  on  manufactures  of  wool,  together  with  an  ad  valorem 
duty  for  protection. 

Immediately  after  the  passage  of  the  Morrill  act  the  war 
broke  out.  Under  the  pressure  of  the  need  for  revenues  Con- 
gress passed  a  long  series  of  acts  increasing  the  duties  on  purely 
revenue  articles,  putting  duties  upon  articles  hitherto  free,  and 
raising  as  compensation  the  protective  duties.  The  idea  of 
giving  compensatory  duties  was  extended  to  cover  the  burden 
of  internal  taxes  also.  Thus  the  manufacturers  were,  in  1864, 
given  special  compensatory  duties  to  offset  the  heavy  internal 
taxes.  This  remarkable  protectionist  measure,  embodied  in 
the  act  of  1864,  was  rushed  through  Congress  with  only  one 
day's  discussion  in  each  house.  It  represents  the  highest  limit 
ever  reached.  Nearly  1500  articles  were  enumxcrated ;  the 
average  rate  was  close  to  50  per  cent.  It  shows  the  effect  of 
three  different  forces:  there  was  (i)  the  desire  to  increase  the 
revenues,  (2)  the  feeling  that  the  manufacturer  had  a  good  claim 
for  compensation  for  the  high  taxes  in  general,  (3)  the  mad 
scramble  to  gain  all  that  could  be  gained  from  this  class  of  legis- 
lation. 

This  act  afterward  received  a  number  of  amendments  to  meet 
the  changes  made  in  the  other  parts  of  the  revenue  system,  but 
the  character  of  the  tariff  was  not  materially  changed  until 
1883.  One  of  the  most  interesting  changes,  technically,  was 
the  fixing,  in  1866,  of  the  method  of  ascertaining  the  value  upon 
which  the  duty  was  laid.  It  was  provided  that  the  value  should 
be  determined  by  adding  to  the  value,  at  the  place  of  shipment, 
the  cost  of  transportation,  packing,  commission,  warehousing, 
and  other  charges  which  fell  upon  the  goods  before  their  arrival. 

The  protection  policy  thus  extended  gave  strength  to  vested 
interests  which  thereafter  supported  that  policy.  The  only 
changes  of  note  down  to  1894  arc  the  attempted  reforms  of 
1870,  1873,  and  1883,  and  the  McKinley  tariff  of  1890,  which 


l6o  INTRODUCTION  TO  PUBLIC   FINANCE 

reduced  the  income  by  removing  the  duties  on  purely  revenue 
articles  and  on  very  strong,  self-sustaining  industries,  but  in- 
creased the  protective  features. 

In  1894  came  a  change  that  at  first  appeared  to  be  very  im- 
portant. The  McKinley  bill  of  1890  had  become  practically 
the  platform  of  the  Republican  party,  and  the  Democratic  party 
went  into  power  pledged  to  the  reduction  of  protection.  They 
proceeded  slowly  to  the  fulfilment  of  these  pledges.  The  famous 
Wilson  bill  was  reported  December  19,  1893,  and  became  a  law 
August  27,  1894,  without  the  approval  of  the  Democratic  Presi- 
dent. It  failed  of  his  approval  because  of  the  objectionable 
features  introduced  in  the  Senate.  Two  things  prevented  the 
change  from  being  sweeping.  The  first  was  the  power  of  the 
vested  interests  in  the  protected  industries.  Every  sort  of 
pressure,  short  of  illegal,  was  brought  to  bear  in  favor  of  the 
existing  system.  The  second  was  the  patent  danger  of  too 
sudden  a  decrease.  Sweeping  reform  would  ruin  industries 
and  create  a  depression. 

The  reduced  tariff  was  not  destined  to  remain  long  in  force. 
Within  three  years,  that  is,  in  1897,  there  was  a  deficit  in  the 
treasury,  which  gave  an  excuse  for  new  tariff  legislation.  By 
this  time  the  protectionists  had  rallied  and  were  again  in  power. 
Congress  was  called  together  in  special  session  and  passed  the 
so-called  Dingley  tariff,  as  a  strict  party  measure.  This  tariff 
restored  most  of  the  protective  features  that  had  been  removed  in 
1894.  Protection  was  again  granted  to  wool  as  a  raw  material, 
and  compensatory  duties  were  placed  on  manufactures  of  wool. 
In  some  respects  the  wool  and  woollen  schedule  was  made 
higher  than  ever  before.  Hides,  which  had  been  on  the  free 
list  ever  since  1872,  were  given  a  protective  duty  of  15  per  cent 
ad  valorem,  while,  to  quiet  the  protests  of  the  shoemakers, 
manufacturers  of  leather  received  a  compensatory  duty  that 
fully  made  up  for  the  increased  cost  of  the  raw  material.  On 
cotton  goods,  however,  the  duties  were  slightly  reduced,  al- 
though not  all  along  the  line.  Silk  and  linen  received  a  rather 
substantial  advance.  The  iron  schedule  was  not  materially 
changed  from  the  condition  in  which  it  was  left  by  the  McKinley 


CUSTOMS   DUTIES  l6l 

bill.  The  greatest  struggle  was  waged  around  the  sugar  tarifif. 
The  duty  placed  on  raw  sugar  in  the  Wilson  bill  was  retained 
and  slightly  increased,  while  the  refiners  received  a  differential 
that  afforded  them  very  handsome  protection.  On  the  whole 
the  Dingley  tariff  raised  the  protective  wall  higher  than  ever. 

Ha\dng  reached  this  stage,  the  protective  system  rested 
for  twelve  years.  During  this  time  there  developed,  very 
slowly,  a  sentiment  for  tariff  reform.  The  protectionists  yielded 
a  little  to  this  sentiment,  and  won  the  privilege  of  having  the 
tariff  "  revised  by  its  friends."  In  April,  1909,  Congress  was 
again  assembled  in  special  session  to  "  provide  revenues  to  meet 
a  deficit  "  and  to  consider  a  bill  known  as  the  Payne  biU,  which 
had  been  prepared  by  a  committee  of  Republicans  with  a  view 
to  propitiating  the  sentiment  in  favour  of  tariff  reduction.  Of 
this  bill  the  committee  said :  "  While  it  makes  a  number  of 
reductions  in  the  rates  on  industries  that  can  admittedly  stand 
alone,  it  raises  the  rates  on  certain  industries,  that  in  the  opinion 
of  the  committee  need  more  protection."  This  bill  was  heavily 
amended  in  the  Senate,  where  the  protectionists  were  strongly 
intrenched.  It  was  again  amended  under  pressure  from  the 
Republican  President,  who  interpreted  the  election  promises  of 
his  party  as  favouring  a  revision  downward.  When  the  Presi- 
dent signed  the  bill,  August  5,  1909,  he  summarised  it  as  follows : 

"  This  is  not  a  perfect  tariff  bill,  nor  a  complete  compHance 
with  the  promises  made,  strictly  interpreted,  but  fulfilment, 
free  from  criticism  in  respect  to  a  subject-matter  involving  many 
schedules  and  thousands  of  articles  could  not  be  expected.  It 
suffices  to  say  that  except  with  regard  to  whiskey,  liquors,  and 
wines,  and  in  regard  to  silks  and  to  some  high  classes  of  cottons, 
all  of  which  may  be  treated  as  luxuries  and  proper  subjects 
of  a  revenue  tariff,  there  have  been  very  few  increases  in  rates. 
There  have  been  a  great  number  of  real  decreases  in  rates  and 
they  constitute  a  sufficient  amount  to  justify  the  statement 
that  this  bill  is  a  substantial  downward  revision  and  a  reduction 
of  excessive  rates."  One  of  the  interesting  features  of  the  bill 
is  the  provision  of  two  tariffs  in  one,  which  is  popularly  supposed 
to  be  a  partial  adoption  of  the  idea  of  the  French  maximum  and 


1 62  INTRODUCTION  TO  PUBLIC  FINANCE 

minimum  tariff  above  referred  to.  But  there  is  a  fundamental 
difference,  for  if  the  French  system  is  properly  described  as  a 
"  maximum-minimum  tariff,"  that  proposed  for  the  United 
States  is  a  "  minimum-maximum  tariff."  That  is,  the  French 
system  applies  the  maximum  as  a  norm,  from  which  deductions 
may  be  made  for  favours  received.  But  the  American  system 
applies  the  minimum  as  a  norm,  to  which  additions  may  be 
made  by  way  of  reprisal  in  the  case  of  those  countries  whose 
tariff  policy  does  not  please  the  United  States.  In  other  words, 
the  French  system  is  one  of  reciprocity,  the  proposed  American 
system  one  of  retaliation.  Possibly  no  other  position  can  be 
adopted  by  the  United  States.  She  has  steadfastly  maintained 
that  the  "  most  favoured  nation  "  clause  in  her  commercial 
treaties  cannot  be  construed  as  applying  to  the  tariff,  and  many 
of  the  duties  in  the  tariffs  of  European  nations  are  directed 
specifically  against  the  trade  of  the  United  States  by  way  of 
retaliation  for  her  own  high  duties.  The  bill  is  not  generally 
regarded  as  a  final  settlement  of  the  tariff  question.  It  con- 
tains a  provision  for  the  appointment  of  expert  agents  to  assist 
the  President  in  administering  the  maximum-minimum  clause 
and  many  hope  that  this  will  lead  to  the  collection  of  informa- 
tion which  will  render  a  systematic  and  unprejudiced  revision 
possible. 

There  was  a  downward  revision  of  the  tariff  in  1913,  but 
since  then  the  tariff  question  has  been  slumbering.  The  only 
life  to  be  noted  is  the  creation  of  a  supposedly  permanent 
Tariff  Commission  to  study  tariff  effects  continuously  with  the 
purpose  of  providing  Congress  with  information  whenever 
needed.  The  reports  of  this  commission,  which  are  learned 
and  carefully  prepared,  have  not  yet  been  the  basis  of  any  par- 
ticularly important  action.  From  1914  on  the  tariff  question 
has  been  completely  overshadowed  by  other  greater  issues.  It 
is  probable  that  the  necessary  post-war  reorganization  of  the 
tax  system  will  bring  many  changes  in  the  tariff. 


CHAPTER  VIII 

PROPERTY   TAXES 

Part  i.     The  General  Property  Tax,  with  Special  Reference  to 

United  States 

Section  i  .  The  American  General  Property  Tax.  —  The 
general  property  tax  may  be  defined  as  a  tax  in  which  the  base 
is  the  entire  amount  of  the  property,  real  and  personal,  owned 
by  the  taxpayer.  This  tax  is  old  and  is  a  favourite  tax  for 
local  purposes.  The  general  property  tax  can  be  studied  to 
the  best  advantage  in  the  United  States,  where  it  is  used  more 
extensively,  perhaps,  than  in  any  other  country,  and  where  it 
is  the  main  source  of  revenue  for  very  important  parts  of  the 
government.  It  is  also  used  in  Switzerland  as  the  main  source 
of  revenue  for  some  of  the  component  parts  of  the  federal  State. 
In  Prussia,  Holland,  and  some  other  countries  it  is  used  to 
supplement  other  taxes,  but  when  so  used,  it  takes  on  a  different 
character.  The  federal  government  in  the  United  States  does 
not  levy  any  tax  on  property  in  general.  If  under  the  con- 
stitutional provision,  which  requires  that  direct  taxes  shall  be 
apportioned  among  the  states  in  proportion  to  population,  the 
federal  government  should  levy  a  tax,  that  tax  would  presum- 
ably be  apportioned  among  the  people  by  most  of  the  states  in 
accord  with  their  own  laws,  and  collected  as  their  own  state 
taxes  are  collected. 

We  need  to  see  first  the  relation  in  which  this  tax  stands  to 
the  other  taxes  in  the  system  of  state  and  local  taxation. 

The  individual  states,  the  cities,  and  the  other  local  divisions 
of  government  in  the  United  States  derive  their  revenues  from  a 
considerable  number  of  sources.     They  each  use  some  or  all  of 

163 


l64  INTRODUCTION  TO  PUBLIC  FINANCE 

the  following  taxes:  (i)  the  general  property  tax;  (2)  the  poll 
tax,  payable  either  in  money  or  in  services,  or  in  both  ;  (3)  taxes 
on  selected  kinds  of  business ;  (4)  taxes  on  certain  ways  of  con- 
ducting business,  as  the  corporate  form ;  (5)  inheritance  taxes, 
and  (6),  in  a  few  instances,  income  taxes.  They  also  use  license 
taxes  or  fees  for  permits  which  are  distinguished  from  taxes 
proper  by  the  fact  that  regulation  rather  than  revenue  is  the 
more  important  consideration.  They  also  receive  other  fees  of 
many  sorts,  mostly  small,  for  special  services  to  individuals, 
recording  of  documents,  and  the  like.  Streets,  sewers,  and 
other  similar  pubhc  improvements  are  mostly  constructed  from 
the  proceeds  of  special  assessments  on  the  property  immedi- 
ately benefited.  The  cities,  especially,  not  all,  but  many  of 
them,  and  to  a  very  small  extent  the  states  also,  receive  rev- 
enue from  water  works,  gas  and  electric  works,  street  railways, 
canals,  and  other  public  service  enterprises  and  to  a  very  small 
extent  from  industrial  and  commercial  enterprises.  A  few  of 
the  states  receive  revenue  from  the  sale  or  use  of  public  lands. 
There  are  in  addition  a  number  of  fines  and  penalties  for  vari- 
ous infractions  of  law. 

Among  all  of  these  sources  of  revenue  the  general  property 
tax  stands  preeminent.  It  is  the  structural  iron  which  holds 
the  building  together.  It  is  the  largest  single  source  of  revenue 
and  is  universally  regarded  as  preeminently  the  tax  for  all 
purposes.  There  is  no  state  in  the  Union  in  which  this  tax  does 
not  exist  at  least  as  a  tax  for  local  purposes,  although  there  are 
six  states  in  which  it  is  not  used  to  supply  revenue  for  the  state 
or  central  government.  Without  a  single  important  exception, 
it  is  used  in  every  city,  in  every  town  or  its  counterpart  in  local 
government,  in  every  district,  be  it  a  road  district,  school  dis- 
trict, drainage  or  irrigation  district,  or  a  district  organised  for 
some  other  purpose.  The  few  exceptions  are  insignificant,  and 
are  in  each  case  due  to  conditions  clearly  peculiar. 

The  general  property  tax  of  the  United  States  was,  in  its 
original  conception,  a  direct  personal  tax  for  local  purposes. 
It  was  a  tax  on  persons,  natural  or  corporate,  in  proportion  to 
all  their  property.     The  only  exemptions  were  originally  per- 


PROPERTY  TAXES  165 

sons,  usually  corporate,  like  municipal  corporations,  schools, 
colleges,  and  churches  which  were  regarded  as  performing  some 
pubHc  or  quasi-public  functions.  Sometimes  natural  persons, 
Hke  ministers  of  the  gospel,  paupers,  invalids,  or  veterans  of 
war,  were  exempt  from  pious,  religious,  charitable,  or  patriotic 
motives.  The  present  statutes  still  show  marked  traces  of  the 
personal  character  of  this  tax  as  originally  conceived.  As  an 
illustration  of  the  older  conception  we  may  cite  Vermont,  where 
every  person  was  "  rated  "  or  "  listed  "  for  his  poll,  his  property, 
and  all  his  "  faculties."  In  all  the  older  laws  the  "  person  " 
came  first,  and  his  estate  was  the  attribute  by  which  the  amount 
of  his  tax  was  measured. 

It  was  a  local  tax  intended  primaril}'  for  the  apportionment  of 
neighbourhood  charges  among  neighbours.  The  functions  of 
government  were  at  first  exercised  mainly  by  the  local  divisions. 
Even  as  late  as  1840,  when  the  functions  and  activities  of  the 
state  or  central  governments  had  reached  the  first  stage  in  their 
development,  this  tax  was  used  to  a  very  limited  extent  only, 
for  supplying  revenue  for  other  than  strictly  local  purposes. 
By  slow  degrees  the  larger  unit  of  government,  the  common- 
wealth, began  to  draw  upon  this  source  by  way  of  rates  addi- 
tional to  the  local  taxes.  Strangely  enough,  these  added  rates 
rarely,  if  ever,  took  the  form  of  a  surtax  so  common,  for  example, 
in  Spanish  taxation,  nor  did  the  surtax  conception  enter  Ameri- 
can financial  thought  anywhere  until  after  1890.  Yet  the  effect 
of  these  additional  tax  rates  is  distinctly  the  same  as  that  of 
the  surtax. 

By  degrees,  also,  the  strictly  personal  conception  of  the  tax 
has  been  modified,  and  it  has  steadily  become  more  and  more 
of  an  objective  tax,  or  a  tax  on  things  ownable  regardless  of  the 
owner.  This  change  has  come  about  first  through  customs 
operating  with  the  force  of  law,  and  is  not  even  now  so  apparent 
in  the  statutes  as  it  is  in  the  actual  administration.  With 
several  notable  exceptions,  of  which  New  York  is  a  conspicuous 
example,  the  personal  declaration  of  the  taxpayer  may  still  be 
required  and  is  more  or  less  regularly  exacted.  But  even  where 
this  form  is  still  retained,  property,  even  real  estate,  may  be 


1 66  INTRODUCTION  TO  PUBLIC  FINANCE 

taxed  in  the  name  of  "  unknown  owners."  As  commonly 
conceived  by  legislator,  administrator,  and  taxpayer  alike,  the 
general  property  tax,  as  it  stands  to-day,  is  a  tax  on  all  property, 
irrespective  of  ownership,  within  the  territory  of  the  taxing 
authority,  except  such  as  may  be  expressly  exempted  on  account 
of  its  use  for  a  public  or  quasi-public  purpose  or  out  of  consid- 
eration for  what  is  regarded  as  a  desirable  public  policy.  As 
an  illustration  of  this,  we  may  quote  the  phrase  most  widely 
used  as  the  introductory  sentence  of  the  revenue  laws  of  the 
various  states :  "  All  property,  real  and  personal,  within  this 
state,  not  specially  exempt,  shall  be  taxed  in  proportion  to  its 
value."  Yet  traces  of  the  older  conception  of  a  personal  tax 
remain,  often  inconsistent  and  illogical,  and  giving  rise  to  con- 
fusion of  thought  and  practice. 

Sec.  2.  Types  of  the  Property  Tax.  —  Although  this  ven- 
erable tax,  which  dates  from  soon  after  the  establishment  of 
the  various  colonies  on  the  continent  of  America,  has  been 
developed  in  each  of  the  several  states  from  a  common  origin 
as  to  principles  and  ideas  and  by  very  similar  social,  political, 
and  economic  forces,  yet  there  are  variations  from  state  to 
state,  and  from  one  part  of  the  country  to  another,  which  are 
by  no  means  insignificant.  Some  of  them  are,  in  fact,  so  im- 
portant that  a  failure  to  recognise  them  leads  to  a  serious  con- 
fusion of  thought.  It  is  this  divergence,  in  one  state  or  another, 
from  the  general  type  which  makes  it  so  difficult  to  explain 
briefly  the  nature  of  American  tax  problems.  These  differ- 
ences concern  in  some  degree  the  kinds  and  classes  of  property 
subject  to  the  tax.  But  they  concern  in  far  greater  measure 
the  forms  and  methods  of  administration,  and  as  it  is  on  the 
administrative  side  that  the  greatest  evils  have  been  apparent, 
these  may  be  considered  as  the  more  important. 

Although,  as  just  suggested,  the  constitutional  provisions, 
the  statutes,  the  ordinances,  and  the  equally  potent  controlling 
practices,  customs,  and  traditions  vary  from  state  to  state,  and 
although  no  two  of  them  are  exactly  alike,  it  would  nevertheless 
be  an  exaggeration  to  say  that  there  are  fifty-one  different 
varieties  of  the  general  property  tax  in  the  United  States. 


PROPERTY  TAXES  1 67 

Such  a  statement  would  lay  too  much  emphasis  on  minor  details. 
There  are,  however,  several  more  or  less  distinct  types.  Some 
of  the  differentiating  characteristics  of  these  types  are  the 
result  of  the  dififerences  in  the  framework  of  the  government,^ 
others  arise  from  differences  in  the  social  and  industrial  devel- 
opment. 

In  attempting  to  describe  these  types  in  a  brief  space  we 
inevitably  incur  all  the  dangers  of  any  broad  generalisation. 
It  should  be  understood  that  in  many  cases  the  types  inter- 
blend  ;  also,  that  for  clearness'  sake  we  shall  select  examples 
of  the  extreme  forms  of  each  type.^ 

The  New  England  Type.  —  Among  the  oldest  types  is  that 
which  we  may  call  the  New  England.  This  extends  wherever 
the  New  England  township  form  of  local  government  extends, 
and  even  where  the  township  system  is  modified  by  a  super- 
imposed county  system.  That  is,  in  all  the  territory  north  of 
the  Ohio  River  and  of  its  line  extended  as  far  westward  as  the 
Rocky  Mountains.  It  is  that  type  of  the  general  property  tax 
which  is  the  historical  outgrowth  of  the  well-known  and  famous 
"  township  "  system  of  local  government.  It  differs  from  the 
other  types  not  so  much  by  reason  of  any  difference  in  the  under- 
lying conception  of  who  and  what  is  taxable,  as  it  does  in  its 
administrative  features.  In  general,  the  administrative  or  tax 
district  is  small,  very  small.  In  the  "  West  "  it  is  a  township, 
six  miles  square ;  in  older  settled  states  it  may  be  even  smaller, 
it  may  be  a  city  ward.  Sometimes  this  district  contains  only 
a  few  hundred  inhabitants,  rarely  over  five  thousand,  and  the 
number  of  taxpayers  is,  of  course,  very  much  less,  perhaps  a 
fifth  or  an  eighth  of  the  population.  Consequently  there  may 
be  considerable  common  knowledge  of  each  other's  affairs 
among  the  taxpayers,  at  least  outside  the  cities,  and  the  assessors 
may  be  assumed  to  have  some  knowledge  of  the  property  which 

•  Any  reader  not  familiar  with  the  various  forms  of  local  government  in  the 
United  States  will  find  enlightenment  in  Fiske,  Civil  Govcrnmenl  in  the  United  States; 
Bryce,  American  Cotnmonweallh ;  and  Hinsdale,  American  Government. 

^ The  reader  who  wishes  to  delve  into  the  muilittuiinous  details  and  variations 
is  referred  to  the  present  writer's  contribution  to  the  Census  Volume  on  Wealth, 
Debt,  and  Taxation.     Special  Report,  12th  Census,  1907. 


1 68  INTRODUCTION  TO  PUBLIC  FINANCE 

they  are  to  assess  and  of  the  value  thereof.  The  assessors, 
for  there  are  often  several  in  one  township,  are  elected  for 
short  terms,  one  year  or  two  years,  and  in  some  cases  perform 
their  oificial  functions  without  interrupting  their  ordinary 
vocations.  Their  work  can  usually  be  performed  in  a  few  weeks. 
In  short,  the  administration  is  democratic,  springing  from  the 
taxpayers  themselves  and  ever  under  their  control. 

There  are  many  variations  of  this  type.  There  are  some  in 
which  there  is  no  central  control  at  all,  or  so  Httle  that  it  has  no 
influence,  and  others  in  which  the  administration  is  quite  highly 
centralised.  Between  these  two  extremes  are  many  degrees. 
We  have  space  for  only  two  examples,  one  at  each  extreme, 
Rhode  Island  and  Indiana.  Rhode  Island's  old  system  prior 
to  1910  will  serve  to  illustrate  a  highly  decentralised  system. 
Rhode  Island,  as  has  often  been  pointed  out,  is,  as  a  state, 
a  sort  of  federation  of  small  towns,  each  retaining  a  de- 
gree of  autonomy  and  independence  greater  than  such  units 
enjoy  anywhere  else  in  the  country.  Here  the  state  had 
very  few  functions  to  perform,  and  the  "  county  "  was  a 
mere  grouping  of  towns  into  court  districts,  a  geographical 
rather  than  a  political  conception.  The  tax  for  state  and 
county  purposes,  the  county  expenses  being  met  from  the  state 
levy,  was  less  than  10  per  cent  of  the  total  amount  raised  by 
means  of  the  general  property  tax.  Consequently  there  was 
no  fiscal  reason,  or  at  least  not  a  strong  one,  for  central  super- 
vision. The  state  levy  was  until  very  recently  apportioned 
roughly  among  the  towns  at  long  and  irregular  intervals,  of 
about  sixteen  years  each,  by  a  sort  of  contractual  agreement 
between  the  towns  made  through  their  representatives  in  the 
legislature  and  taking  the  form  of  law.  The  administration  of 
the  tax  was,  therefore,  almost  purely  a  matter  of  local  concern, 
although  provided  for  by  a  general  statute.  Each  of  the 
towns,  many  of  which  contain  less  than  two  thousand  inhabit- 
ants, elects  each  year  in  town  meeting  not  less  than  three 
nor  more  than  seven  assessors,  also  a  tax  collector.  The  asses- 
sors were  all-powerful,  their  action  nearly  final.  There  was  no 
provision  for  review  or  for  equalisation  between  individuals. 


PROPERTY  TAXES  169 

The  only  recourse  an  aggrieved  taxpayer  had  was  to  take  the 
matter  into  the  courts.  Not  even  the  date  when  the  assess- 
ment was  to  be  made  and  to  which  it  appHed  was  fixed  for  the 
state  at  large,  each  town  selecting  these  to  suit  itself.  Such 
is  the  extreme  of  the  democratic  or  New  England  type  of  the 
general  property  tax. 

Equalisation.  —  In  most  of  the  other  states  having  the  same 
general  type  of  this  tax  there  are  local  boards  of  review,  usu- 
ally consisting  of  the  local  council,  "  trustees,"  with  power  to 
revise  the  assessments  made  by  the  assessor.  In  still  others, 
owing  primarily  to  the  greater  importance  of  the  central  or 
state  functions,  and  the  consequently  larger  proportional 
amount  of  state  taxes  to  be  apportioned,  there  is  more  central 
control.  The  cruder  form  of  this  central  control  is  a  state  board 
of  equalisation  with  limited  power  to  review  the  work  of  the 
local  assessors.  Such  boards  do  not,  as  a  rule,  change  indi- 
vidual assessments,  but  by  making  a  nominal  valuation  for  each 
township  or  tax  district  as  a  whole  determine  the  amount  which 
each  town  shall  pay  to  the  state.  But  that  amount  is  appor- 
tioned among  the  individual  taxpayers  on  the  basis  of  the  orig- 
inal assessment.  Such  boards  as  these  are  virtually  appor- 
tioning boards  only.  A  fine  example  of  this  is  afforded  by 
Michigan,  where  an  apportionment  of  state  taxes  is  made  only 
once  in  five  years,  and  each  town  adds  to  its  tax  rate  enough 
to  raise  its  quota  of  the  state  tax.  There  is  thus  no  general 
state  tax  rate. 

Central  Tax  Commission.  —  From  this  crude  form  of  cen- 
tralisation, which  scarcely  affects  the  local  or  decentralised 
character  of  the  tax  administration,  we  pass,  from  state  to  state, 
through  varying  degrees  of  centralisation  until  we  come  to  those 
like  Indiana.  That  state  has  the  old  general  property  tax 
almost  pure  and  undefilcd  in  principle  and  theory,  and  yet 
has  a  very  powerful  central  controlling  board.  The  original 
assessment  is  still  made  by  a  multitude  of  local  assessors  elected 
and  acting  in  the  small  townships.  But  these  assessors  are 
supervised  and  directed  by  county  assessors,  one  for  each 
county,  who  are  assisted  by  other  officers  and  act  as  the  agents 


lyo  INTRODUCTION  TO   PUBLIC   FINANCE 

or  representatives  of  the  central  or  state  board.  By  confer- 
ences, instruction,  and  sharp  supervision,  backed  by  the  right 
to  discharge  assessors,  the  central  board  exercises  a  very  effec- 
tive control  reaching  down  into  each  township. 

There  are  two  controlling  reasons  for  this  development  of 
central  supervision.  The  first  is  that  the  proportionate  amount 
of  state  and  county  taxes  to  be  apportioned  is  greater.  Thus 
in  Rhode  Island,  as  we  have  seen,  the  state  tax,  which  includes 
county  taxes,  is  less  than  ten  per  cent  of  the  total  tax,  while 
in  Indiana  the  state  and  county  taxes  amount  to  nearly  half 
of  the  total  taxes  on  property.  Clearly,  then,  any  inequalities 
in  the  valuations  between  the  different  towns  become  at  once  of 
great  importance.  If,  for  example,  a  given  town  that  has  prop- 
erty which  at  the  average  rate  of  valuation  for  the  state  would 
be  assessed  at  $200,000  and  would  usually  pay,  say,  $2000  in 
town  taxes  and  $2000  in  state  taxes,  should  make  its  valuation 
only  $100,000  it  would  pay  in  town  taxes  still  $2000,  but  would 
pay  in  state  taxes  only  $1000,  throwing  $1000  unjustly  on  other 
towns.  The  other  controlling  reason  for  greater  centralisation 
is  the  existence  of  railroads  and  other  great  public  service  cor- 
porations whose  property  lies  in  many  townships.  The  local 
assessor  may  know  all  about  the  value  of  farm  lands  in  his  little 
town,  and  how  much  a  cow  or  a  hog  is  worth,  but  he  cannot 
possibly  know  how  much  six  miles  of  railway,  track,  part,  per- 
haps, of  a  great  transcontinental  railway  system,  are  worth. 
Such  properties  can  only  be  valued  as  part  of  a  whole.  Hence, 
the  application  of  the  so-called  "  unit  rule  "  necessitates  a  state 
board.  This  reason  for  the  centralisation  of  the  administration 
of  the  general  property  tax  exists,  also,  in  states  not  having 
the  New  England  type  of  this  tax,  but  it  is  far  more  potent  in 
states  where  that  type  exists  because  of  the  extreme  smallness 
of  the  assessment  district. 

The  Southern  Type.  —  A  second  type  of  the  general  property 
tax  is  found  in  the  Southern  states,  and  may,  for  that  reason, 
be  called  the  Southern  type.  In  general,  it  is  found  in  the 
territory  south  of  the  Ohio  River  and  as  far  west  as  Louisiana. 
It  is  almost  everywhere  accompanied  by  an  extensive  system 


PROPERTY  TAXES  171 

of  business  license  taxes  which  fill  in  certain  gaps  in  the  general 
property  tax,  and  hence  modify  the  classes  of  property  to  be 
included.  On  its  administrative  side  it  has  been  determined 
by  the  county  system  of  local  government  which  exists  in  those 
states  where  it  is  in  force.  The  county  being  a  very  much  larger 
unit  of  local  government  than  the  township,  both  in  population 
and  territorial  area,  its  government  is  necessarily  more  repre- 
sentative and  the  type  of  property  tax  developed  is  less  demo- 
cratic. The  county  performs  all  the  functions  of  local  govern- 
ment, outside  of  the  cities  which  are  usually  separately  incor- 
porated. The  county  revenues  collected  from  the  property 
tax  are  in  most  cases  equalled  or  exceeded  by  those  collected 
for  the  state,  a  condition  almost  the  reverse  of  that  in  New 
England.  From  the  beginning  the  state  or  central  government 
loomed  larger  and  had  more  functions  to  perform  in  the  South 
than  in  the  North.  Ignoring,  for  purposes  of  brevity,  the 
differences  between  individual  states,  we  may  venture  to  gen- 
eralise as  follows :  Under  the  general  supervision  of  the  county 
court,  which  has  administrative  as  well  as  purely  judicial  func- 
tions, the  assessor  or  a  small  board  of  assessors  makes  the 
valuation  of  property.  As  this  officer  cannot,  in  the  nature  of 
things,  know  many  of  the  taxpayers  whose  property  he  is  to 
value,  nor  much  about  values  in  portions  of  the  county  remote 
from  his  home,  his  duties  are  far  more  difficult  than  those  of  the 
town  assessors  in  the  North  and  very  different  in  character. 
Personal  declaration  by  the  taxpayer  is  required,  at  least  by 
law,  and,  in  general,  more  respect  is  assumed  to  be  paid  to  the 
values  declared  by  him.  Penalties  for  failure  to  make  a  dec- 
laration are  more  severe  and  more  often  enforced.  The  dili- 
gence of  the  assessor  is  stimulated  by  commissions,  it  being 
customary  to  compensate  him  by  a  percentage  of  the  taxes  levied. 
Nevertheless  considerable  property  escapes  and  it  is  not  uncom- 
mon to  find  so-called  "  back  tax  commissions  "  or  other  officers 
authorised  to  assess  property  not  placed  on  the  rolls  by  the 
assessors.  These  commissions  are  more  nearly  a  part  of  the 
regular  machinery  of  government  and  quite  unlike  the  guerilla 
or  private  "  inquisitors  "  of  Ohio,  to  which,  as  an  anomaly, 


172  INTRODUCTION  TO  PUBLIC   FINANCE 

much  attention  has  been  devoted.^  There  is  also  a  more  pro- 
nounced tendency  in  these  states  to  use  the  general  machinery 
of  government  for  the  levy  and  collection  of  this  tax,  and  not 
to  create  a  special  and  entirely  separate  set  of  officers.  Thus 
the  sheriff  or  the  treasurer  is  often  ex-officio  tax  collector. 
State  supervisory  boards  are  usually  composed  of  ex-officio 
officers  of  the  state,  such  as  the  governor,  the  auditor,  and  the 
treasurer,  or  the  attorney-general,  and  property  of  a  general 
character  like  the  railroads  is  assessed  by  them.  Everywhere 
else  in  the  country  the  rate  is  always  determined  by  appor- 
tionment, but  in  many  Southern  states  a  proportional  (per- 
centage) rate  is  fixed  by  statute  and  changed  only  at  com- 
paratively long  intervals. 

The  Pacific  Coast  Type.  —  The  third  and  last  type  is  the 
Pacific  coast  type.  This  prevails  in  the  states  on  and  west  of 
the  Rocky  Mountains,  and  in  a  modified  form  in  Texas.  Al- 
though, like  the  other  types,  it  takes  on  various  forms,  yet  it  is 
rather  more  uniform  than  the  other  two,  and  this  in  spite  of 
the  tendency  of  the  people  of  this  part  of  the  country  to  experi- 
ment with  weird,  fantastic,  and  evanescent  theories.  This 
type  resembles  the  Southern  type  more  than  the  New  England 
type.  In  fact,  the  state  of  Missouri  was  one  of  the  acknowl- 
edged sources  from  which  this  type  was  drawn.  It  differs 
from  the  Southern  type  more  in  spirit  and  traditions  than  in 
outward  form.  The  county  is  here  an  administrative  district 
of  the  state  government.  But  the  county  has  less  autonomy 
than  in  the  South,  most  of  its  activities  being  directed  by  general 
statutes  under  the  supervision  of  state  officers  or  bureaus. 
In  New  England  and  in  the  South  authority  flows  to  a  certain 
extent  from  the  local  units  to  the  state,  in  the  far  West  it  flows 
only  from  the  state  down  to  the  local  units.  The  state's  share 
of  the  general  property  tax  is  usually  about  one-third  of  the 
whole,  including  what  the  state  raises  for  the  purpose  of  equal- 
ising the  expense  of  maintaining  the  school  system,  which  is 
paid  over  to  the  counties  for  expending,  but  under  general  laws. 
The  assessment  is  made  by  a  county  assessor  elected  for  a  long 

1  Carver,  Tax  Inquisitors  in  Ohio. 


PROPERTY  TAXES  1 73 

term,  usually  of  four  years.  He  is  assisted,  usually,  by  many 
deputies  and  may  assign  them  districts.  Personal  declarations 
by  the  taxpayers  are  required  by  law,  but  very  irregularly  en- 
forced. The  county  administrative  board  acts  as  a  board  of 
review  or  "  equalisation  "  as  between  individuals.  There  is 
always,  in  this  type,  a  state  board  of  equalisation  whose  func- 
tions, however,  differ  from  those  exercised  by  boards  of  a 
similar  name  in  the  states  of  the  East  and  of  the  Middle  West. 
As  has  been  stated  above,  those  Eastern  boards  usually  make 
a  nominal  valuation  for  the  purpose  of  apportioning  the  state 
taxes,  and  the  "  state  tax  rate  "  resulting  may  differ  in  every 
town,  because  each  town  in  assuming  its  allotted  quota  of  state 
taxes  again  apportions  it  on  the  basis  of  its  own  valuations. 
That  is,  in  the  New  England  t}^e  the  valuations  placed  against 
individual  properties  are  not  changed  by  state  board  action. 
In  the  Western  type,  if  the  state  board  of  equalisation  decides 
that  it  is  necessary  to  raise  the  valuation  in  a  given  county, 
say,  10  per  cent,  that  10  per  cent  is  added  to  each  individual 
assessment  on  the  rolls,  and  the  state  rate  is  the  same  for  every 
county  and  every  taxpayer.  The  county  "  rate  "  might,  conse- 
quently, be  reduced  by  such  action.  Property  of  a  general 
character  like  railroads  is  assessed  by  a  central  or  state  board, 
usually  by  the  state  board  of  equalisation. 

The  Three  Types  Nowhere  Pure.  —  In  thus  marking  out  and 
attempting  to  describe  briefly  the  three  main  types  of  the 
general  property  tax  on  its  administrative  side  in  the  United 
States  the  writer  is  fully  aware  that  he  is  treading  on  new 
ground.  He  is  also  keenly  conscious  that  his  broad  generalisa- 
tions are  dangerous.  It  may  well  be  that  he  should  have  made 
a  fourth  group  of  states  like  Michigan,  Minnesota,  Wisconsin, 
and  Ohio,  which  present  many  peculiarities.  It  may  be  pos- 
sible that  the  differences  noted  are  not  the  most  distinctive 
that  might  have  been  selected.  His  purpose  was,  however,  to 
point  out  that  there  is  not  "  a  "  general  property  tax  in  the 
United  States,  but  fifty-one  different  property  taxes,  which 
fall  into  three  or  four  general  groups.  Since  it  is  the  admin- 
istrative side  of  this  tax  which  breaks  down  and,  as  we  have  seen, 


174  INTRODUCTION   TO  PUBLIC  FINANCE 

since  there  are  many  different  types  of  this  tax,  it  follows  that 
there  is  no  universal  remedy  for  the  existing  evils. 

Sec.  3.  The  Property  Subject  to  This  Tax.  —  Passing  now 
from  the  administrative  features,  let  us  turn  to  the  content,  the 
property  subject  to  the  tax.  The  statutes  quite  generally 
define  the  locus  of  the  taxable  property,  the  time  at  which  its 
value  and  amount  shall  be  taken,  and  the  kinds  and  character 
of  the  property  to  be  included.  There  has  been  no  particular 
difficulty  so  far  as  real  estate  is  concerned  with  the  place  con- 
cept, it  is  real  estate  within  the  town,  or  the  county,  or  the 
state  that  is  taxable  irrespective  of  the  residence  of  the  owner. 
But  when  it  comes  to  personal  property,  especially  to  intangible 
personal  property,  there  has  been  and  still  is  much  trouble,  and 
no  clear  principle  of  interstate  comity  has  yet  emerged.  The 
original  theory  was,  as  we  have  seen,  that  this  tax  was  a  per- 
sonal tax,  and  that  theory  very  naturally  adopted  the  legal 
theory  that  personal  property  takes  the  situs  of  its  owner. 
But,  in  general,  the  practice  now  is  to  tax  personal  property 
where  found,  if  found  at  all,  and  the  residence  of  the  owner  has 
little  significance.  A  notable  example  of  the  uncertainty  of 
ideas  on  this  subject  was  afforded  when,  a  few  years  ago,  the 
state  of  Vermont  expressly  exempted  all  personal  property  out- 
side the  state  belonging  to  residents.  Although  it  was  generally 
assumed  that  this  was  done  from  the  alleged  unworthy  motive 
of  tempting  rich  New  Yorkers  to  take  up  a  nominal  residence 
in  Vermont  and  thus  evade  taxation  in  New  York,  whose  laws 
make  the  situs  of  personalty  follow  the  owner,  yet  this  action 
merely  legalised  what  has  become  a  very  general  practice. 

The  difficulty  of  determining  the  situs  of  personal  property 
is  the  reason  why  the  attempt  to  tax  stocks  and  bonds  to  the 
owner  has  been  practically  abandoned,  and  in  its  place  it  has 
become  customary  to  tax  the  property  represented  by  such  se- 
curities to  the  corporations,  and  to  ignore  the  stockholder. 

Many  anomalies  have  arisen  from  this  conffict  of  the  theory 
that  the  property  tax  is  a  personal  tax  with  the  fact  and  practice 
that  it  has  become  a  real  tax.  A  very  pretty  illustration  of  this 
is  afforded  in  the  case  of  national  banks.     It  will  be  recalled 


PROPERTY  TAXES  I 75 

that  the  national  banks  were  established  at  the  time  of  the 
Civil  War  to  aid  in  the  sale  of  the  federal  bonds,  and  that  to 
induce  the  national  banks  to  hold  these  bonds,  those  banks  were 
allowed  to  issue  notes  secured  by  the  bonds.  These  national 
bank-notes  came  into  competition  with  notes  issued  by  banks 
chartered  by  the  states.  To  drive  the  state  bank-notes  out  of 
the  way  and  to  thus  make  room  for  the  national  bank-notes, 
Congress  imposed  a  tax  of  10  per  cent  on  all  bank-notes  except 
those  of  national  banks.  It  had  long  before  been  decided  by 
the  courts  that  the  states  could  not  tax  a  federal  bank  except 
by  express  grant  of  Congress.  It  was  feared  that  the  states,  if 
allowed  to  tax  national  banks  at  all,  might  retaliate  by  pro- 
hibitive or  discriminating  taxes.  Hence  Congress  did  not,  in 
the  first  act,  convey  to  the  states  the  power  to  tax  these  banks. 
Later,  however,  it  relented  and  prescribed  a  method,  and  one 
method  only,  by  which  the  states  should  tax  national  banks. 
In  this  federal  statute  permitting  the  taxation  of  national  banks 
we  find  embodied  the  prevailing  theory  and  practice  of  the  prop- 
erty tax  of  that  period.  The  statute  says,  in  substance,  that  the 
shares  of  stock  in  national  banks  must  be  assessed  to  the  stock- 
holder, not  to  the  bank,  although  the  bank  may  be  the  agent 
of  the  stockholder  in  paying  the  tax,  also  that  the  shares  must 
not  be  taxed  at  a  higher  rate  than  is  imposed  on  any  other  like 
moneyed  capital.  Then  to  prevent  double  taxation  which 
might  have  arisen  where  the  stockholder  resided  in  a  different 
state  or  town  from  that  in  which  the  bank  was  located.  Congress 
defined  the  situs  of  the  stock  as  in  the  place  where  the  bank 
was  located. 

It  is  hard  to  trace  the  origin  of  a  practice  which  may  have 
sprung  spontaneously  in  many  different  places  from  similar 
conditions  which  had  to  be  met.  But  one  cannot  but  be  im- ' 
pressed  by  a  reading  of  the  statutes,  and  by  the  frequency  with 
which  the  phraseology  of  the  federal  law  is  repeated  therein, 
with  the  idea  that  this  law  has  had  a  great  deal  to  do  with 
destroying  the  theory  of  personal  situs.  On  the  other  hand, 
it  has  certainly  not  checked  in  the  least  (except  so  far  as  the 
banks  alone  arc  concerned)  the  very  general  tendency  to  regard 


176  INTRODUCTION  TO  PUBLIC   FINANCE 

a  corporation  as  an  artificial  person  and  to  levy  the  taxes  on  its 
property  without  reference  to  the  stockholders. 

Assessment  Day.  —  The  time  element,  the  date  to  which  the 
assessment  refers,  is  usually  defined  so  as  to  work  the  piactical 
exemption  of  the  current  products  of  land.  Thus  for  the  most 
part  the  assessment  is  made  as  of  some  day  in  the  winter  or 
spring,  before  the  crops  of  the  year  have  been  planted  and  long 
after  the  crops  of  the  year  previous  have  been  sold  and  taken 
to  market,  at  a  time,  that  is,  when  barns  and  warehouses  are 
empty.  This  strikingly  illustrates  the  prevailing  American 
conception  that  the  property  tax  is  a  tax  on  capital,  not  on 
income  or  revenue.  With  a  sort  of  grim  humour  "  All  Fools' 
Day  "  is  often  chosen  as  tax  day.  Even  in  those  states,  mostly 
among  those  having  the  Southern  t}^e  of  this  tax,  which  make 
the  day  to  which  the  assessment  refers  fall  in  the  autumn,  the 
crops  and  produce  of  the  year  are  usually  expressly  exempted 
by  law. 

Definitions. — The  property  included  in  the  base  of  this  tax  is 
most  commonly  defined  as  "  all  property,  real  and  personal,  in 
the  state  not  specifically  exempt."  The  exemptions  will  be 
discussed  below.  The  terms  "  real  and  personal  property  " 
are  most  commonly  taken  in  their  ordinary  common  law  mean- 
ing. But  this  is  by  no  means  the  universal  rule.  In  many  cases 
certain  items  are  arbitrarily  defined  "  for  purposes  of  taxation  " 
as  real  or  as  personal  property.  Ordinarily,  land  and  the 
legally  immovable  physical  improvements  thereon  are  real 
estate.  Certain  rights,  however,  attaching  to  land,  mortgages 
secured  on  land,  and  franchises  over  lands  are  arbitrarily  called 
real  estate  or  personal  property  for  purposes  of  taxation,  irre- 
spective of  their  common  law  character.  As  these  arbitrary 
definitions  are  not  uniform  from  state  to  state,  they  give  rise  to 
considerable  confusion.  Sometimes  even  the  following  of  the 
common  law  principle  makes  curious  shifting.  One  of  the  most 
striking  illustrations  of  this  is  the  classification  of  possessory 
claims  to  government  land  and  of  the  improvements  upon  it 
as  the  personal  property  of  the  settler  thereon  during  the  five 
years  that  he  is  acquiring  his  title,  and  before  the  government 


PROPERTY  TAXES  177 

patent  has  been  issued.  The  census  of  1890  pubhshed  tables 
and  charts  which  made  it  appear  that  the  then  "new"  state  of 
Montana  had  a  remarkably  high  proportion  of  personal  property 
and  comparatively  little  real  estate.  This  was  due  in  large  part 
to  the  above  classification.  The  arbitrary  nature  of  these 
definitions  vitiates  almost  all  direct  comparisons  of  the  statistics 
of  assessments  between  different  states. 

It  occasionally  happens  that  for  tax  administrative  reasons 
or  to  avoid  special  difficulties  arising  from  some  peculiarity  of 
the  law,  very  illogically  arbitrary  definitions  are  made.  Thus 
telegraph  poles  and  lines  are  defined  in  one  state  as  personal 
property,  a  device  intended  merely  to  give  the  assessor  an  extra 
commission ;  again,  in  New  York  special  franchises  or  the  right 
to  use  the  public  streets  is  defined  as  real  estate.  The  reason 
for  this  latter  definition  is  that  in  that  state  each  taxpayer  is 
allowed  to  deduct  the  amount  of  his  debts  from  the  entire 
amount  of  his  personal  property,  and  under  that  law,  if  fran- 
chises were  defined  as  personal  property,  the  corporations  own- 
ing them  would  deduct  their  bonded  indebtedness,  leaving 
nothing  taxable  on  the  franchise. 

Occasionally  certain  items  of  income  are  defined  as  property 
for  purposes  of  taxation.  These  instances  are  usually  of  re- 
ceipts, like  those  from  ships  plying  in  foreign  water,  or  insurance 
premiums,  or  brokers'  commissions,  which  are  not  represented 
by  any  taxable  capital  in  the  state.  This  is  a  survival  of  the  old 
personal  theory  of  the  property  tax. 

The  classes  of  personal  property  taxable  and  actually  taxed, 
at  least  to  a  hmited  extent,  are  usually  household  and  office 
furnishings,  stocks  of  goods  in  shops  and  warehouses,  farm 
tools,  machinery,  and  live  stock.  Other  forms  of  personal 
property  generally  taxable  according  to  law,  but  rarely  taxed, 
are  money  and  credits.'  The  moot  questions  in  regard  to  the 
taxation  of  the  latter  will  be  discussed  below. 

Sec.  4.  Exemptions.  —  Property  exempt  from  taxation 
comprises  in  the  first  place  all  pul)lic  property,  also  greenbacks 
and  federal  bonds  exempt  by  federal  law.  The  only  excej^lion 
here  is  that  in  a  few  states  public  property  may  be  included 


178  INTRODUCTION  TO  PUBLIC   FINANCE 

when  the  apportionment  of  state  taxes  is  made  to  towns  or  other 
assessment  districts.  Next  in  general  extent  come  exemptions 
granted  from  religious,  pious,  charitable,  or  benevolent  reasons, 
such  as  churches,  cemeteries,  asylums,  and  homes  for  the  aged, 
the  infirm,  and  widows.  The  breadth  and  extent  of  these 
exemptions  varies  considerably  from  state  to  state,  but  even  in 
the  most  meagre  cases  includes  all  church  buildings  and  ceme- 
teries. An  interesting  extension  of  this  idea  is  the  exemption  in 
many  states  of  the  secret  societies,  like  the  Masons  and  Odd 
Fellows,  on  the  ground  of  their  charities.  Another  very  gen- 
eral class  of  exemptions  comprises  those  for  educational  pur- 
poses, such  as  schools,  colleges,  and  the  like,  usually  only  those 
endowed,  also  pubHc  libraries,  and  literary,  scientific,  and  phil- 
osophical societies.  A  smaller  group  is  composed  of  associations 
like  agricultural  societies,  volunteer  fire  companies,  and  others 
doing  some  work  assumed  to  be  of  a  public  character.  Lastly, 
there  are  many  miscellaneous  exemptions  granted  for  social 
or  economic  reasons  or  for  reasons  relating  to  the  fiscal  admin- 
istration ;  among  these  are  limited  amounts  of  certain  classes 
of  personal  property,  as  a  few  hundred  dollars'  worth  of  house- 
hold furniture,  tools  of  mechanics  and  farmers,  a  limited  amount 
of  land,  machinery,  etc.,  for  promoting  new  industries  for  a 
limited  period  of  time.  But  there  is  little  uniformity  among 
the  various  states  with  reference  to  this  group  of  exemptions. 

In  general  it  may  be  said  of  the  exemptions  granted  that, 
while  they  have,  of  course,  been  granted  only  to  those  who  had 
sufiicient  political  influence  to  secure  them,  they  do  not  in  any 
but  a  very  few  exceptional  cases  represent  an  abuse  of  political 
power.  The  motives  were  in  general  altruistic  or  for  the  public 
weal.  It  is,  furthermore,  a  thoroughly  well-estabHshed  prin- 
ciple of  fiscal  law  that,  whenever,  and  in  so  far  as,  any  such 
property  yields  any  private  profit,  it  loses  its  exemption. 

Sec.  5.  The  Assessment  Roll. — The  Hst  of  taxpayers  with 
their  taxable  property  is  usually  made  up  annually  and  does 
not  assume  the  form  of  a  fixed  cadastre  in  any  of  the  states, 
although  in  some  states  it  approaches  that  form  slightly.  The 
original  conception  of  the  tax,  as  a  personal  tax,  is  the  chief 


PROPERTY  TAXES  179 

reason  why  the  roll  usually  begins  with  the  taxpayer  and  not 
with  the  property,  and  the  consequent  frequency  of  assessment 
prevents  the  roll  from  attaining  a  permanent  form.  In  the  case 
of  real  estate,  however,  there  is  here  and  there  a  provision  which 
contains  the  possible  germ  of  a  cadastral  system.  In  a  few 
states  real  estate  is  revalued  only  once  in  four  years,  but  altera- 
tions and  new  improvements  are  assessed  annually.  In  some 
states  the  county  surveyor  provides  maps  and  block  books 
which  the  assessor  uses  as  the  basis  of  his  work.  But  even  in 
those  states  there  is  little  permanence  imparted  to  the  roll  by 
this  practice.  Two  reasons  for  the  absence  of  a  cadastral 
system,  especially  in  the  more  recently  settled  states  and  in 
those  parts  of  the  country  which  are  growing  rapidly  in  popula- 
tion, is  the  constant  and  frequent  change  in  ownership  of  land 
and  the  rapid  fluctuation  in  land  values. 

Valuation.  —  The  criterion  of  value  for  purposes  of  taxation 
is  always  the  seUing  value,  and  rarely  the  rental  value.^  The 
reader  should  remember  that  there  is  practically  no  tenant 
class  in  the  United  States,  that  agricultural  land  is  for  the  most 
part  cultivated  by  its  owners,  or  by  tenants  who  expect  to 
become  land  owners.  The  annual  value  of  the  use  of  land  is  a 
conception  rarely  used  in  business.  It  is  the  capital  value  or 
selling  value  that  is  almost  always  referred  to  and  used.  Lands 
change  hands  with  considerable  frequency,  and  with  great  ease 
and  freedom.  How  much  land  is  worth  per  acre  in  the  country 
and  per  square,  or  per  front,  foot  in  the  cities  at  purchase  is 
usually  a  better-known  fact  than  rental  values.  While  admit- 
tedly the  value  of  land  depends  on  the  product,  yet  rental 
values,  when  determined,  are  usually  computed  on  the  basis 
of  a  percentage  of  the  capital  values  rather  than  of  the  product. 
Assessors  in  making  up  their  rolls  depend  upon  prices  paid 
when  transfers  are  made,  or  upon  appraisements,  for  determin- 
ing the  value  of  land,  and  rarely,  if  ever,  seek  any  information 
as  to  rentals.  This  is  equally  true  of  city  real  estate  and  of 
farm  lands.     In  the  same  way  boards  of  cquaHsation  in  at- 

'  Delaware  and  New  Jersey  and  parts  of  Maryland  and  Pennsylvania  offer  the 
necessary  exceptions  to  prove  the  rule.     In  these  old  states  rentals  are  considered. 


l8o  INTRODUCTION  TO  PUBLIC   FINANCE 

tempting  to  check  up  the  work  of  assessors  investigate  selling 
prices,  and  not  rentals.  In  fact,  the  leasing  of  land  is  so  rare, 
and  usually  occurs  under  such  peculiar  circumstances,  that 
rentals  never  afford  a  satisfactory  basis  of  valuation.  Accord- 
ing to  the  United  States  Census  Bureau,  only  35  per  cent  of 
the  farms  of  the  country  are  cultivated  by  tenants,  but  among 
these  rented  "  farms  "  are  many  truck  farms,  dairies,  nursery 
gardens,  and  florists'  gardens  in  the  vicinity  of  cities,  which  are 
more  often  rented  than  is  agricultural  land  proper.  Another 
reason  why  rental  values  are  not  used  for  taxation  purposes  is 
that  in  many  states  there  are  large  tracts  of  land  not  under 
cultivation.  Less  than  50  per  cent  of  all  land  in  the  United 
States  is  "  improved  " ;  that  is,  under  cultivation,  and  less  than 
three-fourths  of  that  actually  in  farms  is  "  improved."  Yet  the 
unimproved,  unused  land  has  a  selling  value  in  the  market, 
and  is  taxable.  In  the  same  category  fall  the  unimproved  city 
lots,  held  for  speculation. 

The  use  of  the  selling  value,  or  a  capital  concept,  instead  of 
the  rental  value,  introduces  an  element  of  uncertainty  into  the 
assessment  or  valuation  of  land  for  purposes  of  taxation.  A 
great  deal  is  left  to  the  discretion  of  the  assessors ;  they  have  no 
mathematical  rule  which  they  can  follow.  In  the  British  prop- 
erty and  income  tax.  Schedule  A  is  the  most  sure  and  certain 
group,  on  account  of  the  prevalence  of  a  universal  system  of 
leasing,  and  in  the  German  states  the  values  in  the  cadastre  can 
be  fixed  with  a  high  degree  of  certainty  and  accuracy  on  the 
basis  of  annual  rental  value  or  known  annual  produce.  Nothing 
of  that  sort  is  possible  in  the  United  States.  What  is  usually 
meant  by  the  terms  "  full  cash  value,"  or  "  true  value,"  is 
perhaps  best  defined  as,  in  the  terms  of  the  California  statute, 
"  the  amount  at  which  property  would  be  taken  in  payment 
of  a  just  debt  from  a  solvent  debtor."  It  is  not  what  would  be 
paid  by  the  highest  bidder,  nor  what  the  property  might  bring 
at  a  forced  sale,  but  more  nearly  what  it  would  be  appraised  at 
in  the  settlement  of  an  estate  for  division  among  the  heirs. 
This  conception  is  at  best  vague,  and  leaves  much  to  the  discre- 
tion of  the  officers.     Hence  it  is,  that  in  order  not  to  err  by  ex- 


PROPERTY  TAXES  l8l 

cessive  valuations,  the  assessors,  in  practice,  universally  fall 
below  the  true  value  as  defined  by  law.  In  states  where  a  heavy 
state  tax  is  apportioned  on  the  basis  of  local  assessments,  there 
is  a  further  motive  for  undervaluation  ;  namely,  the  endeavour 
on  the  part  of  the  assessor  to  save  money  for  his  constituents 
by  evading  part  of  the  state  tax.  The  prevailing  practice  of 
undervaluation  has  been  recognised  by  law  in  some  states. 
Thus  in  lUinois  only  one-fifth  of  the  true  value  is  to  be  entered 
in  the  roll.  But,  nevertheless,  undervaluation  goes  on  just  the 
same  and  the  20  per  cent  is  computed  on  less  than  100  per  cent 
of  the  true  value. 

Inequalities  in  Valuation.  —  Far  worse  than  the  general 
undervaluations  which  create  inequalities  between  districts  are 
special  or  individual  undervaluations.  These  are  in  rare  in- 
stances the  result  of  corruption  or  conscious  favouritism ;  more 
often  they  arise  from  the  natural  inertia  of  the  officials  who  do 
not  make  the  roll  keep  pace  with  the  changes  in  property  and 
its  value.  Various  devices  have  been  resorted  to,  to  obviate 
or  lessen  these  inequalities.  The  official  boards  of  review  usu- 
ally become  mere  umpires  to  decide  disputes  between  assessors 
and  dissatisfied  taxpayers.  Somewhat  more  successful  in  cities 
has  been  the  introduction  of  a  graduated  scale  of  values  in  each 
block,  the  inner  lots  being  valued  according  to  their  distance 
from  the  corner.  In  the  West  it  is  quite  common  to  find  a 
provision  to  the  effect  that  unimproved  land  must  not  be  valued 
at  less  than  improved  land  of  the  same  quality  and  similarly 
situated.  This  is  doubtless  a  provision  suggested  by  Henry 
George's  theory. 

A  rather  important  provision,  as  tending  to  stimulate  the 
assessor  to  take  greater  pains  in  his  work,  is  that  which  requires 
that  land  and  the  improvements  thereon  shall  be  valued  and 
assessed  separately.  This  seems  to  have  originated  in  Cali- 
fornia. It  has  recently  been  rediscovered  by  New  York,  and 
adopted  there  with  great  enthusiasm. 

Personalty.  —  The  assessment  of  ])crsonal  properly  presents 
the  greatest  difiiculties.  The  main  difficulty  is  to  find  it.  Some 
kinds  of  tangible  personal  property,  such  as  cattle  and  animals 


l82  INTRODUCTION  TO  PUBLIC  FINANCE 

on  farms,  wagons,  machinery,  tools,  etc.,  are  not  difficult  to 
find,  and  as  easily  valued.  In  states  where  there  are  large 
herds  of  cattle,  as  in  Nevada,  it  is  the  custom  for  assessors  to 
agree  upon  a  uniform  value  per  head.  Household  furniture 
can  as  easily  be  found,  but  difficulty  at  once  arises  over  values. 
In  every  state,  except  New  York,  the  taxpayer  is  by  law  re- 
quired to  fill  out  a  minute  inventory  of  all  his  furniture  and 
other  personal  property.  But  he  frequently  ignores  the  law, 
and  the  assessor  proceeds  by  a  sort  of  doomage  process,  which 
amounts  usually  to  a  guess  based  on  the  general  character  of 
the  house  the  taxpayer  lives  in,  his  household  equipment,  and 
his  general  financial  standing.  In  New  York,  where  no  state- 
ment is  required,  the  taxpayer  is  allowed  to  appear  on  "  griev- 
ance day  "  and  "  swear  off  his  taxes,"  if  he  feels  that  the  guess 
made  by  the  assessors  is  too  high.  The  enforcement  of  the 
statement  and  the  reliance  placed  upon  it  varj^  from  state  to 
state,  and  even  from  locality  to  locality  within  each  state,  to 
such  an  extent  that  no  generalisation  can  be  made  with  safety. 
It  is  certainly  the  intention  of  the  law  that  every  taxpayer 
should  file  a  statement  of  his  entire  property,  and  the  penalties 
for  failure  to  do  so  are  severe.  But  it  is  equally  true  that  this 
provision  is  not  uniformly  enforced,  and  that  the  vast  majority 
of  the  statements  filed  are  incorrect  and  incomplete.  These 
statements  usually  have  to  be  sworn  to  when  filed,  and  the 
widespread  perjury  and  consequent  contempt  of  law  constitute  a 
sad  and  a  menacing  feature  of  the  political  life  of  the  country. 

Sec.  6.  The  Taxation  of  Mortgages.  —  One  of  the  moot 
questions  in  the  United  States  is  whether  credits  and  money 
should  be  considered  property  for  purposes  of  taxation.  The 
debate  on  this  question  has  been  especially  lengthy  in  connec- 
tion with  mortgages,  because  they  are  usually  of  record,  or  will 
be  reported  by  the  borrower,  so  that  they  are  more  easily  dis- 
covered than  other  credits.  If  we  include  the  evanescent  forms 
of  discussion,  it  is  safe  to  say  that  there  has  been  far  more 
literature  on  the  taxation  of  mortgages  than  on  all  other  sub- 
jects relating  to  taxation  in  the  United  States. 

In  most  states  a  note  secured  by  a  mortgage  is  taxable  as 


PROPERTY  TAXES  183 

property  of  the  mortgagee,  and  the  property  which  secures  the 
mortgage  is  taxable  to  the  mortgagor  without  deduction  for  the 
mortgage.  It  is  obvious  that  this  procedure  rests  on  the  old 
conception  of  the  general  property  tax  as  a  personal  tax.  The 
thought  of  the  legislator  is  that  the  lender  is  able  to  pay  a  tax 
by  virtue  of  the  interest  income  he  receives.  That  in  most 
cases  the  lender  will  reimburse  himself  by  shifting  the  tax  to 
the  borrower  in  the  form  of  higher  interest  does  not,  in  the 
opinion  of  the  legislator,  present  any  good  reason  why  an  at- 
tempt, at  least,  should  not  be  made  to  reach  the  lender.  The 
most  recent  departure  from  this  rule  is  to  impose  a  special  tax 
on  the  mortgage  of  the  nature  of  a  registration  tax  at  a  rate 
considerably  lower  than  would  be  the  result  of  taxing  it  as 
property.  The  property  by  which  the  mortgage  is  secured  is 
then  taxed  in  full  to  the  borrower.  This  is  in  substance  the 
outcome  of  the  long  struggle  in  New  York  State.  This  method 
assumes  that  the  holding  of  the  mortgage  represents  taxpaying 
abihty  of  some  sort  vested  in  the  lender.  It  is  not  unlike  the 
conception  underlying  the  Prussian  law  which  imposes  an  addi- 
tional tax  on  funded  income  in  the  form  of  a  property  tax, 
even  though  the  income  from  the  property  has  already  been 
taxed  as  part  of  the  taxpayer's  income.  Another  solution  of 
the  problem  is  to  treat  the  mortgage  as  an  interest  in  the  prop- 
erty and  to  try  to  divide  the  burden  between  the  two  parties. 
This  in  any  case  avoids  double  taxation.  In  California  the 
attempt  was  made  to  compel  the  lender  to  pay  the  tax  by  at 
least  making  him  advance  it.  It  became  evident,  however, 
that  he  shifted  the  tax  to  the  borrower,  whose  last  state  was 
worse  than  his  first,  because  he  had  to  pay  not  only  the  tax  but 
the  cost  of  shifting  as  well.  In  Massachusetts  a  similar  com- 
promise was  made  in  that  the  mortgage  and  the  surplus  of  the 
property  over  the  mortgage  were  assessed  separately,  one  to  the 
lender  and  one  to  the  borrower,  but  these  two  parties  were  al- 
lowed to  agree  as  to  who  should  pay  the  mortgage  tax.  Generally 
the  borrower  assumed  the  whole  burden  with  corresponding 
reduction  in  interest.  This  is  obviously  a  roundabout  way  of 
accomplishing  a  very  simple  thing,  hence  some  few  states  simply 


l84  INTRODUCTION  TO   PUBLIC  FINANCE 

ignore  the  mortgage  entirely.  Thus  the  statutes  of  Washington 
provide  "  that  mortgages  and  all  credits  for  the  purchase  of 
real  estate  shall  not  be  considered  as  property  for  the  purpose 
of  taxation."  Recently  that  state  has  extended  the  same  prin- 
ciple to  all  credits.  This  latter  provision  simply  legalises  a 
prevailing  practice,  for  credits  other  than  mortgages  were  rarely 
found  by  the  assessor. 

Money  and  Credits.  —  It  is  the  law  in  most  of  the  states 
(Washington  by  recent  enactment  is  one  of  the  exceptions), 
and  it  is  prevailing  public  sentiment,  that  money  on  hand,  or 
on  deposit,  and  credits  are  taxable  property.  But  it  is  only  in 
rare  instances  that  they  are  taxed.  Of  the  more  usual  attempts 
to  uncover  personal  property  of  this  class  through  the  machinery 
of  oaths,  affidavits,  and  the  like.  Professor  Daniels,  in  his  work 
on  Public  Finance,  says :  "  The  effectiveness  of  such  laws  is 
inconsiderable.  If  Jove  laughs  at  lovers'  vows,  he  probably 
gufifaws  at  taxpayers'  oaths.  Even  the  Psalmist's  hasty  alle- 
gation of  universal  mendacity  needs  little  qualification  in  this 
province  of  finance.  Where  the  taxpayer's  conscience  is  tender, 
he  finds  (as  one  puts  it)  that  virtue  is  perforce  its  own  reward. 
This  phase  of  the  system  is  described  in  one  tax  report  as 
*  a  tax  upon  ignorance  and  honesty,'  and  in  another  report 
we  are  told  that  '  the  payment  of  the  tax  on  personalty  is 
almost  as  voluntary  and  is  considered  in  pretty  much  the 
same  light  as  donations  to  the  neighbourhood  church  or 
Sunday  school.'  " 

There  are  two  consequences  of  this  almost  universal  evasion. 
The  first  is  that  when  money  is  loaned  under  circumstances 
which  make  it  at  all  likely  that  it  will  be  found  by  the  assessor, 
the  rate  of  interest  is  raised  above  what  it  would  otherwise  be 
by  an  amount  sufficient  to  cover  the  tax,  together  with  another 
extra  charge  for  the  cost  of  shifting  and  attendant  risk.  The 
second  is  that  any  "  ignorant  and  honest  taxpayers  "  who  may 
report  this  class  of  property  are  unduly  taxed.  It  seems,  then, 
to  be  futile  to  try  to  tax  this  class  of  property,  and  the  under- 
lying reason  for  the  failure  to  reach  it,  and  for  the  objection 
which  people  in  general  have  to  paying  it,  is  probably  to  be  found 


PROPERTY  TAXES  185 

in  the  fundamental  fact  that  it  should  not  be  taxed  at  all.  Although 
credits  may  be  included  within  the  term  "  property,"  from  the 
point  of  view  of  law,  they  are  not  property  in  any  true  economic 
sense.     Like  money,  credits  are  representative  wealth. 

The  following  citation  from  the  report  of  the  California 
Commission  on  the  reform  of  the  revenue  system  of  that  state 
explains  this  point :  "If  we  take  the  view  that  the  property 
tax  should  be  a  real  tax,  based  upon  things  or  property  without 
respect  to  who  may  own  them,  then  it  is  illogical  to  regard  a 
credit  as  property.  A  credit  is  merely  a  right  on  the  part  of  the 
creditor  to  receive  and  to  enforce  payment  of  the  obligation 
due  from  some  other  person.  The  notes,  bonds,  or  other  docu- 
ments embodying  the  credits  merely  stand  as  evidence  of  the 
existing  contract.  The  very  existence  of  the  documentary 
proof  and  the  phraseology  in  which  many  of  these  documents 
are  couched  demonstrate  very  clearly  that  the  creditor  himself 
is  not  in  possession  of  the  money,  or  lands,  or  the  goods  which 
secure  the  loan,  and  the  transfer  of  which  to  the  debtor  brought 
the  credit  into  existence.  The  creditor  has  only  the  right  to 
receive  these  things,  or  similar  things,  back  at  some  future 
time.  If  the  United  States  government  borrows  $100,000,000 
upon  bonds,  —  which  are  merely  its  promise  to  pay,  —  there 
is  a  transfer  of  $100,000,000  in  gold  from  the  buyers  of  the  bonds, 
or  the  creditors,  to  the  United  States  treasury.  The  creditors 
who  hold  the  bonds  feel  themselves  no  poorer  than  before,  but 
no  one  would  seriously  contend  that  by  this  simple  transaction 
the  property  or  wealth  of  the  country  has  been  increased  a 
particle.  There  is  only  $100,000,000  of  real  wealth  involved, 
which  has  passed  into  the  possession  of  Uncle  Sam  from  that  of 
his  creditors,  and  which  will  be  returned  when  the  bonds  are 
paid.  Nor  would  any  one  seriously  contend  that  the  payment 
by  the  United  States  of  some  of  its  indebtedness  and  the  can- 
cellation of  the  bonds  destroyed  any  wealth.  Standing  against 
every  credit  there  is  an  equal  amount  of  indebtedness,  and  the 
maturing  of  this  indebtedness  destroys  no  material  wealth,  nor 
does  its  creation  add  anything  to  the  material  wealth  of  the 
world  or  to  the  substantial   property  which  has  to  bear  the 


l86  INTRODUCTION  TO  PUBLIC   FINANCE 

burden  of  taxation.  To  consider  that  credits  are  property  as 
well  as  the  goods  and  other  property  by  which  they  are  secured 
is  like  adding  together  two  sides  of  an  account  —  the  assets 
and  the  liabilities.  To  treat  credits  as  property,  and  also  the 
lands,  goods,  and  other  forms  of  wealth  in  the  hands  of  the 
community,  would  result  in  an  obvious  duplication  of  values, 
and  if  taxes  were  levied  upon  that  basis  would  result  in  double 
taxation,  unless  the  debtor  were  allowed  to  deduct  the  amount 
of  his  debts  in  the  same  way  that  we  permit  him  to  do  in  the 
case  of  mortgages.  But  the  existing  laws  do  not  usually  per- 
mit that,  save  and  except  that  the  debtor  may  deduct  his  debts 
from  the  amount  of  his  credits.  Illustrations  of  the  way  in 
which  the  taxation  of  credits  works  objectionable  double  taxa- 
tion might  be  multiplied  and  the  argument  extended  indefinitely, 
but  the  above  illustrations  ought  to  be  sufi&cient  to  make  clear 
the  fundamental  principles  involved." 

Sec.  7.  Taxation  of  Corporation  Franchises.  —  As  has  been 
stated  above,  corporations,  when  subject  to  the  general  property 
tax,  are  generally  regarded  as  legal  persons  and  are  taxed  in 
the  same  manner  as  any  other  persons.  A  special  difficulty  is 
involved  in  the  taxation  of  the  so-called  intangible  personal 
property  of  the  corporations.  This  class  of  property,  some- 
times called  "  the  franchise,"  sometimes  "  the  corporate  excess," 
and  often  simply  "  the  intangible  property  "  is  the  capitalised 
value  of  that  part  of  the  net  earnings  that  is  in  excess  of  a  reason- 
able return  on  the  amount  invested  in  the  real  estate,  machinery, 
and  other  tangible  property  of  the  corporations.  Its  value 
for  purposes  of  taxation  is  usually  obtained  by  ascertaining, 
first,  the  value  of  the  real  estate  and  other  tangible  property; 
second,  the  aggregate  market  value  of  the  stock,  bonds,  and 
other  funds  representing  the  property ;  and  third,  by  deducting 
the  first  from  the  second.  The  remainder  is  assumed  to  be 
the  value  of  the  intangible  property.  When  the  market  value 
of  the  securities  cannot  be  ascertained,  the  net  earnings  are 
capitalised  in  order  to  ascertain  the  aggregate  value  of  the 
property.  This  whole  process  presents  great  difficulties  and 
leaves  much  to  the  discretion  of  the  assessing  officials. 


PROPERTY  TAXES  187 

The  legal  theory  is  that  this  excess  value  is  the  value  of  a 
class  of  property  called  the  franchises,  conferred  upon  corpora- 
tions by  governmental  authority.  The  courts  have  defined 
franchises  as :  "  special  privileges  conferred  by  government  on 
individuals  and  which  do  not  belong  to  the  citizens  of  the 
country  generally  by  common  right."  ^  As  these  franchises 
are  legally  property,  they  are  included  in  the  taxable  property. 
It  is  generally  recognised  that  there  are  three,  or  possibly  four, 
different  kinds  of  franchises  that  enter  into  and  contribute  to 
the  corporate  excess.  But  the  attempt  to  assess  or  value  them 
separately  is  rarely  made,  and  in  the  nature  of  things  is  not  suc- 
cessful. Their  value  merges  in  one  mass  with  other  elements 
analogous  to  "  good- will,"  and  the  only  practical  method  of 
valuation  is  to  treat  them  as  a  unit. 

The  first  of  the  franchises  recognised  by  the  courts  is  the 
right  "  to  be  "  a  corporation,  a  privilege  accorded  to  any  three 
or  more  persons  who  associate  together  in  the  manner  pre- 
scribed by  law  for  the  formation  of  private  corporations.  This 
franchise  conveys  the  right  to  use  the  corporate  name,  to  have 
a  corporate  seal,  to  sue  and  be  sued,  and  in  general  to  enjoy  the 
privileges  ordinarily  permitted  to  corporations.  While  this 
franchise  is  theoretically  included  with  the  others  in  the  corpo- 
rate excess,  it  is  also  subject  to  a  fee  at  the  time  it  is  granted 
and  may  also,  together  with  the  second,  be  subject  to  an  annual 
fee-like  tax,  in  addition  to  the  taxes  imposed  upon  it  as  part  of 
the  property.  These  charges  may  be  uniform  or  they  may  be 
graduated.  The  second  sort  of  taxable  franchise  is  called  the 
franchise  "  to  do  and  to  act."  This  is  inevitably  conferred  at 
the  same  time  as  the  first  mentioned  and  is  but  slightly  different 
in  character.  Third,  the  revenue  laws,  as  interpreted  by  the 
courts,  seem  to  recognise  two  other  kinds  of  franchises,  which 
we  may  call,  for  convenience,  special  and  general,  but  they  are 
so  closely  analogous  as  to  be  exceedingly  difficult  to  distinguish 
one  from  another.  These  are  both  subject  to  taxation  as 
property,  and  are  included  in  the  assessment  of  the  property 

>  Such  franchises  arc  not  to  he  confused  with  the  right  to  exercise  the  electoral 
power. 


l88  INTRODUCTION  TO  PUBLIC  FINANCE 

of  the  corporations.  One  of  these  franchises  requires  a  special 
grant ;  the  other  is  acquired  automatically  under  the  enjoyment 
of  the  powers  conferred  by  the  general  law  for  incorporation, 
and  is,  as  will  be  explained  below,  very  closely  akin  to  "  good- 
will." These  two  classes  of  franchises  are  here  grouped  together 
and  treated  as  one  class,  simply  because  they  are  to  be  valued 
for  purposes  of  taxation  in  practically  the  same  manner. 

The  first  of  all  to  be  recognised  as  taxable  franchises  were 
the  special  franchises  enjoyed  by  public-service  corporations, 
such  as  water  companies,  gas  companies,  street  railway  com- 
panies, and  the  like,  which  use  the  public  streets,  under  some 
special  permission.  These  are  "  special  "  in  the  sense  that  they 
have  to  be  specifically  described  in  each  case  and  cannot  be  con- 
veyed by  general  statute,  and  they  virtually  convey  the  right 
to  use  some  public  property.  They  are  often  very  valuable, 
and  that  they  were  so  was  early  recognised. 

From  the  practice  of  assessing  these  special  franchises  there 
grew  up  the  practice,  which  has  frequently  been  sanctioned  by 
the  courts,  of  assuming  that  every  class  of  corporations  enjoys 
a  sort  of  general  franchise  that  is  distinct  from  the  mere  right 
to  be  a  corporation,  or  to  act  as  a  corporation.  Thus  banks 
have  been  taxed  for  their  "  franchises  "  and  their  value  ascer- 
tained in  the  manner  described  above.  While  these  two  classes 
of  franchises,  which  for  convenience  we  have  called  the  special 
and  the  general,  are  apparently,  in  the  opinion  of  the  courts, 
almost  precisely  alike  and  are  treated  in  the  same  manner  for 
the  purposes  of  taxation,  they  are,  from  the  economic  point 
of  view,  fundamentally  different. 

The  franchise  of  a  bank,  in  this  sense,  is  closely  analogous 
to  that  kind  of  property  known  as  "  good- will."  This  is  a  class 
of  property  which  presumably  might  be  taxed  as  property, 
but  which  as  a  rule  is  never  taxed  except  in  those  cases  in  which 
it  is  enjoyed  by  corporations,  and  then  it  is  taxed  as  a  franchise. 
It  is  a  question,  open  for  serious  consideration,  whether  the 
taxation  of  such  a  franchise,  tantamount  to  the  taxation  of  the 
good-will,  against  corporations,  while  similar  items  of  property, 
if  this  be  property,  are  not  assessed  against  individuals  and 


PROPERTY  TAXES  1 89 

firms,  does  not  constitute  an  unjust  discrimination  against  cor- 
porations. 

Sec.  8.  Objections  to  This  Tax. — The  general  property  tax 
has  been  subjected  to  severe  criticisms  and  has  frequently  been 
condemned.  We  may  now  examine  the  grounds  on  which  this 
condemnation  rests.  Among  many  there  are  two  of  great 
importance,  (i)  It  is  urged  that  the  tax  is  unjust  because 
property  forms  no  criterion  of  taxpaying  ability.  It  is  main- 
tained that  income  is  a  far  better  basis.  (2)  It  is  urged  that  the 
general  property  tax  is  inexpedient  because  so  difficult  to  ad- 
minister justly,  especially  in  the  matter  of  the  discovery  and 
assessment  of  personal  property  and  because  of  its  effect  on  the 
movement  of  capital  and  forms  of  investment.  Against  these 
serious  objections  it  is  urged  that  when  there  is  a  tolerably  just 
system  of  income  taxation  already  in  existence,  a  property  tax 
in  addition  thereto  fulfils  the  requirements  of  justice  because 
it  imposes  a  heavier  burden  on  "  funded  "  income,  which  is 
regarded  as  indicative  of  more  faculty,  since  it  is  less  precarious. 
It  also  supplements  the  income  tax  by  making  property  in 
enjoyment,  the  use  of  which  is  an  indication  of  tax  faculty,  a 
part  of  the  base,  as,  for  example,  picture  galleries.  And,  lastly, 
the  comparative  steadiness  of  the  return  from  the  property 
tax  is  a  great  recommendation  from  the  fiscal  standpoint.  It 
would  seem,  then,  that  the  objections  to  the  general  property 
tax  as  the  main  part  of  a  system  may  still  stand,  but  that  there 
may  be  room  for  such  a  tax  as  a  subordinate  part  of  a  larger 
system,  the  demands  of  justice  being  met  by  the  proper  relation 
between  the  different  parts  of  the  system.  In  Switzerland  and 
Prussia  the  general  property  tax  is  part  of  a  more  elaborate 
system.  In  the  United  States  it  stands  almost  alone  for  com- 
monwealth purposes,  supplemented  in  some  states  by  other 
taxes  intended  to  reach  certain  forms  of  revenue-yielding 
property.  The  universal  condemnation  of  the  American  com- 
monwealth general  property  tax  is  therefore  not  due  to  the 
defects  in  the  tax  itself,  but  mainly  to  the  fact  that  it  is  not 
properly  supplemented  by  other  taxes. 

The  first  fjuestion  that  arises  when    the   general   property 


190  INTRODUCTION  TO  PUBLIC  FINANCE 

tax  stands  alone,  and  a  question  which,  although  not  so  promi- 
nent, also  arises  in  other  cases,  is :  Can  the  method  of  assessment 
be  made  sufficiently  effective  to  reach  uniformly  and  equitably 
all  forms  of  property,  especially  personal  property?  The 
answer  to  this  question  that  has  been  given  by  the  experience 
of  the  United  States  is  emphatically  in  the  negative.  This  is 
especially  true  when  the  administration  of  the  assessment  is 
left  to  officials  popularly  elected  for  a  short  term,  in  small  dis- 
tricts, and  by  the  taxpayers  whose  property  they  are  to  assess. 
It  is  also  in  the  negative,  but  somewhat  less  unanimously  so, 
when  the  assessment  is  under  the  control  of  an  impartial 
bureaucracy  appointed  by  some  higher  authority  and  not  be- 
holden to  a  local  constituency.  In  the  one  case  the  assessor 
is  apt  to  be  too  friendly  to  the  assessed,  in  the  other  too  igno- 
rant of  local  conditions. 

Sec.  9.  Scientific  Judgment  of  the  General  Property  Tax. — 
The  property  tax  as  the  sole  or  chief  form  of  direct  taxation 
has  few  supporters  among  scientific  writers.  So  universal 
and  unanimous  has  been  the  condemnation  heaped  upon  this 
tax  that  we  must  consider  in  detail  some  of  the  objections  that 
have  been  raised. 

Professor  Seligman  sums  up  his  interesting  discussion  of  this 
tax  in  words  to  the  following  general  import : 

The  general  property  tax  is  a  failure  as  the  main  source  of 
revenue  from  the  triple  standpoint  of  history,  theory,  and  prac- 
tice. 

1.  Historically,  it  was  once  well-nigh  universal.  In  a  com- 
munity mainly  agricultural  it  was  not  altogether  unsuited  to 
the  conditions.  But  as  soon  as  industry  and  commerce  became 
important,  it  failed  to  extend  so  as  to  comply  with  the  require- 
ments of  justice.  It  became,  in  fact,  even  where  not  so  con- 
sidered, a  tax  on  real  property.  Everywhere  but  in  America 
it  has  been  (o)  divided  into  a  number  of  subordinate  property 
taxes,  (b)  allowed  to  become  a  subordinate  member  of  another 
system,  or  (c)  entirely  abandoned.  Sooner  or  later  it  will  have 
to  be  abandoned  in  America. 

2.  Theoretically  the  general  property  tax  is  deficient  in  two 


PROPERTY  TAXES  191 

respects.  First,  it  assumes  that  there  is  an  ascertainable  general 
property.  But  since  property  is  a  composite  of  inseparable  but 
widely  differentiated  elements,  this  assumption  is  contrary 
to  the  fact.  "  The  general  mass  of  property  has  disappeared, 
and  with  it  vanishes  the  foundation  of  the  general  property  tax." 
Secondly,  "  property  is  no  longer  a  criterion  of  faculty  or  of 
taxpaying  ability."  Two  equal  masses  of  property  may  be 
unequally  productive,  because  used  by  men  of  differing  talents, 
and  thus  differently  joined  with  the  personal  element,  or  because 
the  possession  of  them  may  give  rise  to  fortuitous  gains,  or  be- 
cause the  owner  of  one  mass  of  property  may  be  labouring  under 
peculiar  economic  disadvantages. 

It  is  the  income  which  property  yields  that  is  the  best  index 
of  the  taxpaying  power  which  the  property  represents. 

3.  Practically,  "  the  general  property  tax  as  actiially  adminis- 
tered to-day  is  beyond  all  peradventure  the  worst  tax  known  in  the 
civilised  world.^'  As  at  present  administered,  it  fails  entirely 
to  reach  intangible  property.  It  debases  public  morals  by 
putting  a  premium  on  dishonesty.  It  is  regressive  and  presses 
hardest  upon  those  relatively  least  able  to  pay.^ 

This  is  strong  language,  —  even  stronger  has  been  used. 

Recent  Regeneration  of  the  Property  Tax.  —  Against  this 
condemnation  we  may  set  the  following  important  considera- 
tions. As  this  tax  becomes  more  a  tax  on  things  ownable 
than  a  tax  on  persons  in  proportion  to  their  property  or 
estates  it  becomes  much  more  manageable.  Thus  if  instead 
of  trying  to  include  mortgages,  choses  in  action,  stocks  and 
bonds  we  tax  the  property  they  stand  for  and  represent,  one 
ground  for  criticism  of  the  tax  is  removed  in  no  small  part. 
There  is  a  very  proper  place  in  the  general  system  of  taxation 
for  a  tax,  mainly  local,  on  real  estate  and  tangible  personal 
property  including  the  property  of  corporations  as  well  as  of 
individuals.  If  other  taxes  reach  the  signs  of  ability  which 
the  old  general  property  aimed  at  but  missed  many  objections 
disappear.  Again  in  recent  years  the  administration  of  the  tax 
has  improved.     In  the  great  cities,  especially,  trained  assessors, 

'  Scligman,  Essays,  pp.  23-61. 


192  INTRODUCTION  TO  PUBLIC  FINANCE 

equipped  with  proper  maps,  and  using  well-nigh  scientifically 
accurate  methods  have  reduced  the  inequalities  to  a  negligible 
minimum.  While  rural  assessments  are  not  so  well  adminis- 
tered as  urban,  considered  by  and  large,  yet  there  are  whole 
states  where  under  competent  supervision  of  state  tax  com- 
missions excellent  assessments  at  approximate  equality  are 
being  made.  As  we  now  see  it  the  redemption  of  a  large  part  of 
the  general  property  tax  is  possible  and  in  its  proper  place 
as  a  property  tax,  if  not  a  general  property  tax,  it  may  be  useful 
for  years  to  come. 

Part  2.     Special  Property  Taxes 

Sec.  10.  Forms  of  the  Land  Tax.  —  The  land  tax  is  one  of 
the  oldest  contributions.  It  has  three  forms :  (i)  it  may  be 
based  upon  each  unit  of  area,  sometimes  with  an  attempt  to 
classify  the  different  units  as  to  fertility ;  (2)  it  may  be  based 
upon  the  estimated  value  of  the  land  or  upon  an  estimated 
average  annual  yield  or  surplus ;  (3)  it  may  be  based  upon 
the  actual  yearly  yield,  and  be  as  it  were  a  share  in  the  product. 
The  tax  was  common  in  the  latter  part  of  the  Middle  Ages  as  a 
recognition  of  the  monarch's  right  of  proprietorship  in  the  soil. 
A  good  example  of  this,  among  many  others,  is  afforded  by  the 
so-called  quit-rents  in  the  American  colonies. ^  In  their  first 
form  these  payments  are  not  strictly  taxes.  They  are  acknowl- 
edgments of  the  people's  tenure.  But  they  frequently  grow  into 
taxes.  In  France,  as  we  have  seen,  the  taille  developed  from 
feudal  dues.  The  impot  fonder  now  yields  200,000,000  francs. 
In  England  the  old  land  tax  has  been  converted  into  a  redeemable 
rent  charge,  but  the  revenue  from  land  is  still  taxed  in  the  general 
income  tax  and  yields  £1,500,000  annually.  Local  taxation  in 
most  countries  falls  largely  on  land.  In  Prussia  the  land  tax 
was  in  1895  transferred  entirely  to  the  local  bodies. 

Economic  rent  as  the  surplus  of  revenues  from  land,  after 
all  expenses  have  been  deducted,  has  always  been  regarded  as  a 
legitimate  object  of  taxation.  It  has  been  strongly  argued  that 
this  tax  cannot  be  shifted.     But  as  the  land  tax  is  not  always 

1  See  Ripley  and  Wood. 


PROPERTY   TAXES  1 93 

confined  to  rent-bearing  land,  being  generally  imposed  upon  all 
land,  even  the  poorest  in  cultivation,  and  as  modern  economic 
theory  does  not  regard  rent  as  an  inevitable  surplus,  this  old 
argument  needs  thorough  revision.     (See  Chap.  X.) 

It  is  in  the  assessment  of  this  tax  that  the  cadastre  has  been 
most  widely  used.  The  principles  upon  which  the  best  cadastres 
have  been  built  are  the  following :  (i)  A  careful  measurement 
of  the  land  is  made  and  recorded.  In  the  older  ones  the  land 
is  entered  in  rough  historical  units:  the  "  yoke,"  the  "  hide," 
the  "  seed."  Sometimes  the  cadastre  is  intended  to  serve  other 
purposes,  as  that  of  a  record  of  titles.  In  any  case  the  names 
of  the  owners  or  occupiers  are  entered  with  each  piece.  (2)  A 
record  is  made  of  the  yield  of  each  unit  of  area,  and  from  that  is 
estimated  either  the  gross  revenue  or  the  net  revenue,  —  more 
frequently  the  latter.  As  a  rule  the  cadastral  revenue  is  less 
than  the  actual  net  revenue.  Another  method  is  that  of  record- 
ing the  market  value. 

The  cadastre,  when  finished,  is  subject  to  more  or  less  fre- 
quent revision.  A  partial  revision  which  involves  the  record- 
ing of  changes  of  title,  etc.,  is  generally  made  currently.  An 
entire  revision  is  only  undertaken  after  periods  of  considerable 
length.  The  making  of  a  complete  cadastre  is  a  matter  of 
considerable  expense  and  takes  no  little  time.  In  many  cases 
more  than  the  mere  land  is  recorded,  buildings  and  other  im- 
provements being  frequently  entered  in  the  same  cadastre. 

It  is  generally  urged  in  justification  of  the  retention  of  the 
land  tax,  even  in  countries  where  there  are  other  taxes  that  fall 
upon  the  revenue  from  land,  that  the  income  accruing  from  land 
is  constantly  increasing  in  every  growing  community,  and  that 
the  expenditure  of  the  government  accrues  largely  to  the  benefit 
of  the  land-holders,  and  appears  in  the  form  of  an  increased 
value  or  rental.  The  same  reasons  are  urged  in  support  of  a 
higher  rate  for  the  land  tax. 

On  the  basis  of  a  cadastre  the  land  tax  is  generally  apportioned ; 
less  frequently  it  is  proportioned.  In  general,  the  tax  lends 
itself  better  than  most  others  to  the  apportionment  method. 
With  a  fixed  valuation  as  a  basis  which  varies  comparatively  little 


194  INTRODUCTION  TO  PUBLIC   FINANCE 

from  year  to  year,  it  seems  perfectly  natural  and  easiest  to 
apportion  the  amount  that  it  is  desired  to  raise  among  the 
different  pieces  or  units. 

Sec.  II.  The  Building  Tax.  —  The  older  forms  of  the  land 
tax  often  included  the  building  tax,  with  which  it  was  closely 
connected  in  character.  At  present,  this  contribution  generally 
forms  an  independent  tax  on  the  revenue  from  the  site  and  the 
building.  It  is,  like  the  land  tax,  a  tax  on  a  fixed  source  of  in- 
come.    Its  incidence  will  receive  special  attention  elsewhere. 

The  buildings  taxed  may  be  classified  according  to  value,  or 
according  to  the  uses  to  which  they  are  put,  or  according  to 
their  location,  whether  urban  or  rural.  There  are  two  very 
different  forms  of  the  building  tax:  one  is  intended  to  fall  on 
the  income  derived  by  the  owner  from  the  building ;  the  other 
simply  taxes  the  occupier  according  to  the  rent,  taken  as  the 
index  of  a  certain  amount  of  tax  faculty  on  his  part.  The 
second  is  very  much  like  a  consumption  tax.  The  first  regards 
the  revenue  derived  as  a  source  from  which  the  tax  may  be  paid. 
But  even  this  first  form,  when  paid  by  an  owner  who  is  also  an 
occupier,  is  very  much  like  a  consumption  tax. 

The  building  tax,  wherever  in  use,  is  one  of  a  number  of  other 
similar  taxes;  it  never  stands  alone.  In  ease  of  assessment  it 
has  many  advantages.  The  valuation  is  simple  and  inexpen- 
sive. Alterations  affecting  the  base  can  be  easily  and  accu- 
rately ascertained.  Unlike  the  land  tax,  the  building  tax  is 
regularly  assessed  each  year.  Hence  this  tax  is  more  often  pro- 
portioned than  apportioned.  The  building  tax  may  be  ex- 
tended into  a  sort  of  industry  tax,  as  when  it  is  assessed  with 
higher  rates  upon  buildings  used  for  industrial  or  commercial 
purposes.  An  example  of  this  method  of  assessing  the  business 
tax  is  that  of  France  cited  above. 

Sec.  12.  Increment  Value  Land  Tax.  —  Mention  was  made 
above  of  the  introduction  in  German  cities  of  a  tax  on  the  in- 
crease in  the  value  of  lands  resulting  from  the  growth  of  popula- 
tion. Such  a  tax  has  also  been  used  by  central  governments. 
A  notable  example  is  the  tax  of  Great  Britain,  a  description  of 
which  will  serve  to  show  the  nature  of  all  these  taxes.    The 


PROPERTY  TAXES  I95 

history  of  that  tax  throws  some  light  upon  its  purpose.  The  old 
land  tax  of  1692  was  made  a  redeemable  rent  charge  in  1798  and 
most  of  the  more  valuable  land  had  been  redeemed  in  the  course 
of  the  next  century.  Most  land  was,  therefore,  by  virtue  of  the 
agreement  of  redemption  made  in  1798  supposedly  free  from 
taxation  in  England,  save  and  except  (and  the  exception  is  im- 
portant) that  the  rent  of  land  might  be  included  in  taxable  in- 
come, and  the  local  rates  were  levied  on  the  basis  of  rent  paid. 
But  there  was  no  tax  being  levied  on  the  capital  value  of  land  in 
1909  when  the  increment  value  land  tax  was  proposed.  In 
1909  England  was  in  need  of  larger  revenues,  and  in  casting 
about  for  them  Lloyd  George  hit  upon  the  scheme  of  a  tax  on 
land.  He  argued  that  the  redemption  of  the  old  land  tax  applied 
only  to  the  value  as  it  was  in  1798  when  the  rent  charge  which 
might  be  redeemed  by  payment  of  its  capital  value  was  fixed, 
and  that  any  increase  in  value  since  then  was  beyond  the  scope 
of  the  old  contract  of  exemption.  However,  he  proposed  to 
tax  not  the  increment  since  1798  but  only  that  which  might 
accrue  from  time  to  time  after  1909.  His  plan  aroused  intense 
opposition  in  the  House  of  Lords  where  the  land-holders  were 
represented  and  led  to  a  political  conflict  between  the  Lords 
and  the  Commons  over  the  right  of  the  Lords  to  refuse  their 
assent  to  a  finance  bill.  An  appeal  to  the  people  resulted  in 
sustaining  the  measure  and  also  in  what  would  in  the  United 
States  be  considered  as  an  amendment  to  the  constitution,  al- 
though in  Great  Britain  there  is  no  written  constitution  to 
amend.     For  the  Lords  lost  the  right  to  veto  a  finance  bill. 

The  increment  value  land  duty  was  one  of  four  taxes  levied 
at  the  same  time.  The  others  were  :  First,  a  "  reversion  value 
duty,"  which  is  a  tax  on  the  increase  which  may  be  found  to 
have  occurred  in  the  value  of  a  piece  of  property  which  has 
been  leased,  when,  on  expiration  of  the  lease,  it  reverts  to  the 
original  owner.  Second,  an  "  undeveloped  land  duty,"  an 
annual  tax  on  land  lying  practically  idle  or  not  used  and  de- 
veloped as  it  might  be.  .The  tax  was  light  but  developed  some 
revenue.  Third,  a  "mineral  rights  duty"  falling  upon  the 
annual  rental  value  of  mining  rights.     Wc  shall  confine  our 


196  INTRODUCTION  TO  PUBLIC  FINANCE 

attention  to  the  increment  value  land  duty  alone,  since  the  others 
are  self-explanatory,  or  at  least  will  be  so  when  the  former  is 
understood. 

The  increment  value  duty  is  a  tax  on  the  increase  in  the  value 
of  land  since  April  30,  1909.  It  is  levied  on  the  occasion  of  a 
sale,  or  of  a  transfer  occasioned  by  death.  The  base  is  the  in- 
crease in  value  ascertained  on  the  "  occasion  "  between  (i)  the 
value  as  of  April  30,  1909,  or  (2)  on  the  second  and  subsequent 
sales  or  transfers  each  giving  rise  to  a  new  "  occasion  "  and  the 
next  preceding  "  occasion."  To  fix  the  value  from  which  sub- 
sequent increases  should  be  computed  a  new  Doomsday  Book, 
based  on  a  survey  and  valuation  of  all  the  lands  in  Great  Britain, 
was  to  be  made.  This  was  a  gigantic  and  costly  undertaking, 
as  there  was  no  such  valuation  of  land  on  a  capital  basis  in 
existence.  The  tax  was  to  apply  only  on  the  increment  in  the 
site  value,  which  was  the  value  of  the  land  considered  as  stripped 
of  all  that  had  been  done  by  man  to  enhance  its  value.  As 
nearly  as  may  be  site  value  is  the  present  value  of  the  original 
and  indestructible  characteristics  of  the  land.  Agricultural 
lands  were  exempt,  partly  because  it  was  at  that  time  believed 
that  they  were  not  increasing  in  value,  but  more  because  the 
tax  was  conceived  of  as  aimed  at  land  which  was  passing  from 
the  agricultural  state  to  industrial  or  urban  uses.  The  theory 
of  the  tax  seems  to  be  that  the  site  value  of  land  is  due  to  the 
growth  of  population  rather  than  to  any  economic  activity 
of  the  owners  and  is  hence  peculiarly  indicative  of  ability  to 
pay  taxes.  Elaborate  rules  were  set  up  for  arriving  at  the  site 
value  too  intricate  to  be  reproduced  here. 

The  rate  was  20  per  cent  on  the  excess  of  the  increment  in 
value  over  10  per  cent  of  the  original  value.  An  example  will 
show  the  tax  more  clearly  than  can  be  done  by  description. 
The  site  value  of  a  piece  of  land  was  fixed  in  the  Doomsday  Book 
at  £1000,  five  years  later  it  was  sold  and  the  site  value  reascer- 
tained  was  found  to  be  £1500.  The  tax  would  be  20  per  cent 
of  £1000  plus  10  per  cent  thereof,  or  £1100,  subtracted  from 
£1500,  or  20  per  cent  of  £400,  and  amounts  to  £80.  Another 
period  of  years  passes  by  and  the  land  is  sold  again.     It  is 


PROPERTY  TAXES  197 

now  the  increase  over  £1500  with  due  allowance  of  10  per  cent 
which  becomes  the  subject  of  the  tax.  So  much  of  the  land  of 
England  is  leased  and  sublet  that  leasehold  interests  are  often 
sold  or  inherited  and  so  part  interests  or  leasehold  interests 
were  subjected  to  the  tax,  as  well  as  the  interest  held  by  the 
owner  of  the  fee. 

A  study  made  of  the  incidence  of  this  tax  and  a  comparison 
of  it  with  the  general  property  tax  of  the  United  States  shows 
that  under  parallel  conditions  the  general  property  tax,  which 
draws  the  increment  value  under  taxation  each  year  as  long  as 
it  exists,  would  be  many  times  heavier  than  is  the  increment 
value  tax.i  The  reason  for  this  is  that  the  property  tax  is 
regularly  recurrent  each  year,  while  the  increment  value  tax 
occurs  only  occasionally,  the  owner  meanwhile  having  the  use 
of  the  full  property  undiminished  by  the  tax. 

This  tax  must  not  be  confused  with  Henry  George's  single 
tax.  It  falls  on  the  so-called  unearned  increment  and  was 
devised  by  a  man  named  George,  but  there  the  resemblance 
ceases.  The  single  tax  would  have  to  be  on  the  annual  value 
and  could  not  be  on  the  capital  value.  The  single  tax  would 
have  to  be  an  annual  tax  and  not  one  on  "  occasion." 

This  tax  came  to  an  untimely  end.  The  Doomsday  Book, 
a  very  costly  book  to  write,  was  not  completed  when  the  war 
broke  out.  Moreover  during  the  intervening  period  the  reve- 
nues from  this  tax  were  grievously  disappointing.  The  British 
government  during  the  war  had  no  time  to  spend  on  an  unre- 
munerative  tax  which  was  so  costly  to  administer,  and  its  collec- 
tion was  suspended.  We  are  informed  that  in  1920  the  repeal 
of  the  tax  is  under  contemplation. 

Sec.  13.  Taxation  of  Capital.  —  The  taxes  we  have  already 
considered  cover  most  fixed  capital.  Circulating  capital  also, 
in  all  of  its  many  forms,  has  been  subjected  to  separate  taxes. 
This  is  as  true  of  those  countries  which  have  the  general  property 
tax  as  of  those  which  attempt  to  accomplish  the  desired  results 
by  the  taxation  of  the  various  elements  of  revenue.     How  to 

» See  Plehn,  "  A  Study  of  the  Incidence  of  an  Increment  Value  Land  Tax," 
Quarterly  Journal  of  Economics,  May,  1918. 


198  INTRODUCTION  TO  PUBLIC   FINANCE 

reach  this  kind  of  revenue  and  to  make  the  faculty  which  it 
represents  bear  its  share  of  the  pubhc  burden  is  one  of  the  most 
difficult  practical  problems  of  taxation.  The  chief  difficulties 
arise  from  the  elusive  nature  of  circulating  capital  and  the  inti- 
mate way  in  which  it  is  connected  with  many  of  the  processes 
of  industrial  life.  Justice  and  equahty  demand  its  taxation. 
But  various  pleas  of  expediency  are  against  it.  Capital  is  hard 
to  reach,  and  if  it  is  not  fairly  taxed,  the  result  may  be  injurious 
to  trade.  There  are  two  forms  in  which  this  tax  has  been  applied 
with  some  effectiveness.  One  is  that  of  a  tax  on  mortgages, 
the  other  that  of  a  tax  or  taxes  on  corporations  and  banks. 
Some  results  have  also  been  attained  by  the  attempt  to  tax 
stocks  and  bonds.  Public  stocks  are  especially  easy  of  assess- 
ment. But  there  is  an  objection  to  taxing  them  when  the  other 
forms  of  investment  escape,  because  of  the  bad  effect  on  public 
credit.  If  it  is  distinctly  declared  beforehand  that  the  bonds 
are  to  be  taxed,  their  selling  price  is  lowered.  If  it  is  not  so 
declared,  at  the  time  of  issue,  and  the  tax  is  subsequently  assessed, 
the  process  is  regarded  by  the  holders  as  equivalent  to  a  partial 
repudiation  of  the  debt,  and  subsequent  loans  are  looked  upon 
askance.  When,  however,  all  forms  of  revenue-yielding  capital 
are,  nominally  at  least,  subject  to  taxation,  this  objection  to 
taxing  public  securities  disappears.  If  the  tax  is  not  to  have 
the  effect  of  reducing  the  capital  value  of  the  stock,  bond,  or 
other  security,  it  must  fall  upon  every  form  of  capital.  But 
so  great  are  the  difficulties  of  making  it  thus  universal  that, 
as  a  general  rule,  such  a  tax  affects  the  rate  of  interest  on  all 
new  investments  in  the  taxed  form.  The  foregoing  applies 
only  to  a  tax  on  bonds  as  property  or  capital  and  not  to  the 
inclusion  of  the  interest  thereon  as  part  of  taxable  income  in 
general. 

Taxation  of  Mortgages.  —  Where  there  is  a  complete  system 
of  public  records  for  deeds,  mortgages,  and  contracts,  necessary 
to  their  validity,  it  is  comparatively  easy  to  tax  these  recorded 
securities.  Thus  it  is  that  mortgages  are  generally  easily  tax- 
able. This,  however,  results  in  inequality  if  the  tax  is  not 
extended  beyond  the  recorded  contracts.     When  the  mortgage 


PROPERTY  TAXES  199 

is  upon  property  already  taxed,  as,  for  example,  by  the  building 
tax  or  a  general  property  tax,  the  question  arises  whether  both 
the  borrower  and  the  lender  should  be  taxed,  or  only  one,  and 
if  so,  which  one.  An  able  writer  says  on  this  point,  "  Tax  the 
mortgagee  on  the  amount  of  the  mortgage,  and  the  mortgagor  on 
the  value  of  the  property  minus  the  mortgage.  That  is  the 
only  rational  system."  ^  Indeed,  it  would  be,  if  every  other 
form  of  capital  were  taxed ;  but  when  that  is  not  the  case,  the 
result  is  in  every  respect  the  same  as  though  the  owner  were 
taxed  alone.     Generally  he  pays  more. 

Stoppage  at  the  Source. — -Taxation  at  the  source  has  been 
warmly  recommended  for  reaching  interest  on  capital ;  i.e.  to 
have  the  debtor  advance  the  tax  and  shift  it  if  he  can  to  the 
lender  or  share  it  with  him.  In  the  case  of  corporations,  this 
method  is  applied  to  the  dividends.  As  Bastable  ^  has  well 
shown,  such  a  tax  is  a  combined  tax  on  interest  and  on  profits, 
and  is  therefore  partly  outside  our  present  purpose.  The 
taxation  of  corporations  is  not  always  the  taxation  of  circulating 
capital  merely.  Corporations  often  own  other  taxable  property, 
—  land,  buildings,  etc.  But  in  the  United  States,  one  of  the 
main  objects  of  the  introduction  of  taxes  on  corporations  was  to 
reach  forms  of  personal  property  that  generally  escaped.  The 
other  object  was,  of  course,  to  extend  the  general  property 
tax  to  cover  all  property.  We  find  that  the  basis  of  the  corpora- 
tion tax  is,  in  many  instances,  the  capital  stock  at  its  par  value, 
or  at  its  market  value ;  and  in  a  good  many  instances,  the 
bonded  indebtedness  is  also  included.  When  the  nature  of  the 
business  is  such  that  the  capital  stock  and  bonds  do  not  repre- 
sent all  the  capital  concentrated  in  the  hands  of  the  corporation, 
as,  for  example,  in  the  case  of  banks  and  insurance  companies, 
then  the  business  transacted,  the  gross  earnings,  the  dividends, 
or  the  net  earnings  become  the  basis.  But  no  clear  line  is 
drawn  between  the  taxation  of  interest  and  profits,  so  that 
corporation  taxes  often  approach,  in  character  and  operation, 
business  taxes.^ 

'  Polilkal  Science  Quarterly,  V,  .35.  '  P.  422. 

'  See  Seligman,  Essays,  Chaps.  VI,  VI 1  and  VIII. 


200  INTRODUCTION  TO  PUBLIC   FINANCE 

Sec.  14.  Post-war  Capital  Levies.  —  Quite  different  from  the 
foregoing  is  the  so-called  post-war  capital  levy.  In  many 
countries,  burdened  with  great  war  debts,  it  has  been  proposed 
(1920)  to  levy  a  heavy,  once  and  for  all,  tax  on  capital  to  raise 
money  with  which  to  reduce  the  debts  materially  at  an  early 
date.  At  present  writing  these  are  only  proposals  and  the  form 
they  may  ultimately  take  if  ever  adopted  is  not  discernible. 
Most  of  the  countries  in  which  the  proposal  is  made  have  in- 
come taxes,  or  taxes  taking  a  large  part  of  incomes  directly,  and 
have  no  very  important  taxes  based  on  capital  or  property 
per  se.  They  have  already  raised  the  rate  of  the  income  tax 
and  of  the  other  taxes  about  as  high  as  seems  practicable. 
Hence  they  are  casting  about  for  new  taxes.  One  of  the  taxes 
hit  upon  is  loosely  designated  as  a  capital  tax  or  a  capital  levy. 

When  we  come  to  examine  what  is  meant  by  a  capital  tax 
we  find  no  great  consensus  of  opinion.  Strictly  speaking  capital 
would  include  all  sources  of  fixed  or  funded  incomes  as  distinct 
from  earned  incomes,  and  business  operating  capital  as  well. 
If  that  be  what  is  meant,  the  question  at  once  arises  why  go  to 
the  enormous  trouble  and  expense  of  valuation  and  assessment 
of  all  property,  which  as  the  experience  of  the  United  States  for 
three  hundred  years  shows  is  an  extremely  difficult  task  ?  More- 
over, this  concept  seems  to  imply  that  what  is  to  be  taxed  is 
each  individual's  personal  capital  or  estate,  which  is  the  most 
difficult  of  all  forms  of  a  property  tax  to  assess.  One  might  at 
once  inquire.  Why  not  raise  the  rate  of  the  income  tax  on  un- 
earned incomes  high  enough  to  accomplish  the  same  result, 
even  if  it  ran  to  several  hundred  per  cent?  For,  since  what  is 
desired  is  an  equitable  apportionment  of  a  single  levy,  and 
since  income  is  assumed  to  be  as  fair  a  basis  as  can  be  found, 
and  since  the  recipient  of  earned  income  and  business  profits 
is  ob\dously  a  possessor  of  capital,  the  mere  verbal  absurdity  of 
collecting  over  100  per  cent  of  the  base  chosen  for  apportion- 
ment is  of  no  significance. 

Inequality.  —  But  nearer  inspection  seems  to  show  that  this 
is  scarcely  what  the  more  influential  of  the  proponents  of  a  capi- 
tal tax  mean,  although  there  are  some  who  carry  the  logic  of 


PROPERTY  TAXES  20I 

their  proposal  to  its  extreme,  even  to  capitalizing  wage  incomes, 
to  arrive  at  "  human  capital,"  and  including  all  capital  in  a  heavy 
tax  levy.  Among  the  recipients  of  unearned  income  and  hence 
possessors  of  capital  are  many  who  have  after  all  a  bare  living 
based  on  years  of  toil  and  sacrifice  on  their  part  or  on  the  part 
of  some  one  upon  whom  they  were  dependent.  These  would 
doubtless  be  placed  in  sore  straits  by  a  levy  amounting  to 
several  years'  income  or  to  a  serious  invasion  of  their  capital 
resources.  What  seems  to  be  meant  by  these  persons  is  the 
capital  of  the  well-to-do  and  particularly  of  those  in  business 
whose  capital  is  mobile.  The  British  government  recom- 
mended recently  that  "  war  fortunes  "  be  investigated  as  the 
possible  subject  of  such  a  tax.  This  indicates  that  a  still 
further  hmitation  of  the  field  of  the  levy  is  possible.  In  this 
form  it  would  become  a  sort  of  glorified  excess  profits  tax. 
Whether  public  stocks  and  especially  war  bonds  should  be  in- 
cluded turns  on  the  extent  to  which  that  is  regarded  as  tan- 
tamount to  repudiation.  Those  who  carry  the  notion  to  an 
extreme  would  include  public  debts. 

The  proposed  capital  tax  has  been  a  subject  of  interesting 
economic  analysis.  How  can  a  person  pay  a  tax  equal  to  say 
25  per  cent  or  even  more  of  his  capital?  There  are  several 
possibilities.  The  first  is  some  form  of  borrowing,  or  of  dedica- 
tion of  the  income  of  several  years  or  of  part  thereof  for  many 
years  to  the  payment.  Where  this  is  not  feasible  a  sale  of 
some  property  may  be  possible.  Whatever  property  the  gov- 
ernment might  be  obliged  to  seize  for  collection  would  probably 
be  sold  ultimately.  The  bondholders  who  are  to  be  paid  from 
the  proceeds  of  the  tax  are  possible  purchasers  or  possible 
lenders.  These  two  possibilities  are  tantamount  to  paying 
the  bonds  by  substituting  private  credit  or  private  property 
interests  for  pul)lic  credit.  Whether  this  would  facilitate 
the  readjustment  of  the  burden  to  the  resources  of  the  people 
more  justly  than  a  more  gradual  system  of  taxes  would  do  so 
depends  obviously  on  the  selection  of  ta.xable  capital  made, 
and  on  the  effect  the  procedure  might  have  on  the  stimulus 
to  eflFort.     Generally  speaking  private  credit  is  reckoned  on  a 


202  INTRODUCTION  TO   PUBLIC    FINANCE 

higher  rate  of  interest  than  is  pubhc  credit.  That  would  have 
two  effects.  First,  the  immediate  strain  would  be  increased, 
but  second,  the  period  of  liquidation  would  be  shortened.  If 
there  is  any  force  at  all  to  the  argument  that  the  taxpayer 
strives  after  a  definite  net  income  or  the  maintenance  of  a  fixed 
standard  of  living  then  a  sudden  large  tax  may  drive  him  to 
work  harder  than  would  a  comparatively  smaller  annual  tax, 
although  still  a  heavy  one,  running  for  many  years.  But  there 
is  obviously  some  point  where  the  extra  effort  becomes  too  great 
and  despair  or  discouragement  sets  in.  Even  a  democracy 
may  impoverish  its  taxpayers  by  excessive  tribute  not  re- 
expended  for  a  productive  purpose.  In  such  a  case  repudiation 
of  the  debt  in  whole  or  in  part  is  a  possible  lesser  evil  for  the 
immediate  present.  But  no  nation  which  hopes  ever  again  to 
use  its  credit,  or  fears,  in  a  wholesome  way,  ever  again  being 
forced  to  use  its  credit,  dares  to  repudiate  its  debts,  even  if 
repudiation  be  confined  to  the  debt  due  the  people  at  home. 

A  Poor  Reconstruction  Measure.  —  Lastly  a  general  capital 
tax  large  in  amount  is  so  certain  to  upset  all  the  calculations 
and  plans  of  the  taxpayers,  and  to  overthrow  prescription  that 
it  looks  extremely  dangerous.  As  a  desperate  resort  in  time 
of  war  such  a  tax  might  be  justified.  As  a  measure  for  recon- 
struction after  a  war  it  seems  too  likely  to  introduce  uncer- 
tainty and  disorder  where  certainty,  peace,  and  order  should 
prevail.  It  is  bound  to  be  inequitable,  first,  because  experience 
has  shown  that  accurate  assessment  of  capital  or  property  is 
impossible.  Inequalities  which  hurt  but  little  when  the  tax 
is  I  per  cent  to  2  per  cent  become  unendurable  at  10  per  cent 
and  still  more  so  at  25  per  cent  or  more.  Second,  because  it  is 
not  proposed  as  a  recurrent  or  permanent  tax  but  as  a  "  once 
for  all  "  levy.  This  leaves  no  opportunity  for  the  softening 
influence  of  time  to  smooth  out,  by  interaction  of  economic 
forces,  the  initial  inequalities. 

Inheritance  Taxes 

Sec.  15.  The  Nature  of  Death  Duties.  —  The  group  of  taxes 
levied  on  the  occasion  of  the  death  of  a  property  owner  and 


PROPERTY  TAXES  203 

most  commonly  referred  to  as  inheritance  taxes  or  death 
duties,  grew  in  importance  very  rapidly  during  the  thirty  years 
ending  in  1920.^  It  is  difficult  to  decide  whether  these  are 
direct  or  indirect  taxes.  It  is  a  delicate  question,  whether  some 
if  not  all  of  them  are  first  paid  out  of  the  estate  left  by  the 
deceased  person  and  then  the  burden  is  shifted  to  the  heirs  or 
legatees,  or  whether  they  are  to  be  regarded  as  both  paid  and 
borne  by  the  recipients  of  the  inlieritance  or  bequest.  It  is  of 
course  obvious  where  the  burden  falls.  It  falls  on  the  heirs  or 
legatees.  From  the  administrative  point  of  view  these  taxes 
are  distinctly  indirect  taxes,  for  the  responsible  taxing  official 
cannot  take  the  initiative.  He  must  wait,  patiently  if  he  can, 
for  the  grim  reaper,  death,  to  swing  his  scythe  before  taking  any 
steps  to  assess  or  collect  the  tax. 

While  the  base  is  property  the  tax  is  not  generally  regarded 
by  the  lam^ers  or  by  the  courts  as  a  property  tax.  From  the 
legal  viewpoint  it  is  a  tax  on  the  exercise  of  the  right  of  suc- 
cession. A  definition  very  frequently  quoted  by  lawyers  and 
by  the  courts  in  the  United  States  is  that  the  inheritance  tax 
is  "an  excise  tax  on  the  transfer  or  transmission  of  property 
from  a  decedent  to  his  heirs  or  to  those  who  take  under  his 
will."  The  classification  of  the  tax  as  an  excise  tax  arises  from 
the  peculiar  use  of  the  term  "  direct  taxes  "  in  the  federal  con- 
stitution, a  use  discussed  at  length  in  the  chapter  on  income 
taxes  in  this  book.  But  since  the  inheritance  tax  is  based  on 
property  and  perhaps  sometimes  paid  out  of  property  an  econ- 
omist might  well  say  that  it  is  a  special  property  tax. 

This  tax  may  take  any  one  of  three  different  forms.  The 
first,  and  perhaps  the  oldest,  is  that  of  a  fee  or  fees  and  charges 
for  probate  procedure,  or  for  the  issue  of  legal  papers,  such 
fees  being  made  so  large  as  to  be  in  effect  a  tax.  These  charges 
or  taxes  suggest,  as  do  the  others  in  this  group,  although  in 
lesser  degree,  the  old  feudal  "  relief  "  or  "  heriot,"  which  was, 
in  the  Middle  Ages,  required  to  be  paid  from  the  estate  of  a 

'  Max  West,  The  Inheritance  Tax,  2d  ed.,  1908.  Seligman,  Essays,  p.  307  ff. 
Bastable,  Public  Finance.  Millis,  Quarterly  Journal  of  Economics,  Vol.  XIX, 
p.  288. 


204  INTRODUCTION  TO  TUBLIC   FINANCE 

dead  vassal,  or  by  his  heirs,  in  recognition  of  some  higher 
authority,  and  to  legalise  the  succession.  These  charges  are 
very  often  collected  by  means  of  stamps  affeed  to  certain  docu- 
ments the  use  of  which  is  made  obligatory  and  which  are  essen- 
tial to  the  validity  of  the  probate  proceedings. 

Another  form  is  that  of  an  estate  tax.  In  this  form  the 
tax  is  assessed  and  levied  on  the  corpus  of  the  estate  of  the 
deceased,  without  regard  to  the  division  thereof  into  shares 
for  distribution  among  the  heirs  or  legatees.  In  practice  we 
rarely  find  an  estate  tax  pure  and  simple.  It  is  usually  modi- 
fied to  conform  somewhat  to  the  principles  of  the  third  form 
or  is  combined  with  an  inheritance  tax  proper,  which  is  the  third 
form.  A  pure  estate  tax  is  objectionable  because  it  is  so  apt  to 
cast  a  burden  on  the  residuary  legatee  only.  Thus  if  a  man 
leaves  a  definite  sum  to  each  of  two  children  and  the  remainder 
of  his  estate  to  his  widow,  the  widow  bears  the  whole  tax. 
This  objectionable  feature  of  the  estate  tax  is  less  troublesome 
in  the  cases  where  succession  to  definite  pieces  of  land,  or  to 
specified  stocks  or  bonds,  or  to  fixed  parts  of  the  income  of  an 
estate,  is  involved.  In  the  settlement  of  an  estate,  especially 
if  the  estate  tax  is  or  has  been  anticipated,  an  adjustment  of 
the  burden  among  the  successors  is  usually  provided  for  in  ad- 
vance. 

The  remaining  or  third  form  of  this  tax  is  the  most  common. 
This  is  the  inheritance  tax  proper.  In  this  form  the  tax  is 
levied  on  the  distributive  shares  separately.  That  is,  the  tax 
is  assessed  upon  the  amount  each  heir  or  legatee  would  receive 
if  there  were  no  tax.  Each  and  every  beneficiary  is  separately 
and  independently  liable.  This  renders  possible  a  classifi- 
cation of  beneficiaries  for  the  purpose  of  determining  the  rates, 
and  of  making  abatements. 

The  Meaning  of  the  Term  Estate.  —  While  it  may  seem,  at 
first  glance,  a  petty  technicality,  it  is,  nevertheless,  important 
at  this  point  to  warn  the  reader  against  a  very  confusing  double 
meaning  lurking  in  the  word  "  estate  "  as  used  in  the  tax  stat- 
utes. This  double  meaning  is  so  serious  that  it  has  even  per- 
plexed the  courts  on  many  occasions.     There  is  first  the  estate 


PROPERTY  TAXES 


205 


of  the  decedent,  then  arising  therefrom  come  the  several 
estates  of  the  heirs  and  legatees.  Careful  statute  writers  are 
coming  to  confine  the  term  estate  to  that  of  the  decedent,  using 
"  distributive  share  "  to  indicate  an  interest  passing  to  a  suc- 
cessor. But  many  statutes  still  contain  the  ambiguity,  and 
unless  one  is  very  alert,  and  sometimes  in  spite  of  all  care,  one 
is  misled.  In  the  United  States  federal  inheritance  tax  law  of 
1898  the  ambiguity  was  so  serious  that  the  Supreme  Court 
(see  Knowlton  v.  Moore,  178  U.  S.  41)  gave  the  law  a  forced 
interpretation  in  order  to  make  sense  at  all. 

It  seems  to  be  a  possible  legal  theory  that  the  moment  before 
a  man  breathes  his  last  breath  his  property  lies  in  his  estate, 
and  the  moment  after  that  last  breath  his  property  is  in  the 
several  estates  of  his  successors.  Practically,  however,  so  far  as 
unsupervised  use  and  enjoyment  is  concerned,  there  is  an 
interval  during  which  the  property  rests  in  the  custody  of  the 
state,  or  of  the  court.  This  interval  is  necessary  for  the  delib- 
erative and  recordative  proceedings  setting  up  and  proving  the 
new  estates  and  the  rights  and  titles  of  the  successors.  During 
this  interval  the  legal  title  to  the  property  rests  in  the  executors 
or  administrators  recognised  by  the  court.  No  one  else  can  pass 
title.  Yet  their  control  of  the  property  is  by  no  means  free  or 
unrestricted.  They  must  administer  the  property  and  may 
pass  title  only  as  trustees  for  the  heirs  or  legatees  whose  rights 
of  estate  are  merely  in  suspense  as  to  use  or  sale,  during  an 
interval.  During  this  interval,  presumably  at  its  very  begin- 
ning, the  estate  tax,  if  there  be  one,  attaches,  and  at  its  close 
and  presumably  as  an  incident  essential  to  its  close,  the  inheri- 
tance taxes  attach.  These  simple  and  somewhat  obvious  facts 
as  to  the  time  when  the  original  estate  ceases  and  the  suc- 
cessors' estates  begin  have  a  very  direct  bearing  on  the  con- 
stitutionality of  the  federal  estate  tax  in  the  United  States. 
Unfortunately  the  courts  have  not  expressed  themselves  clearly 
on  these  important  matters. 

British  Death  Duties.  —  In  Great  Britain  the  old  "  probate 
and  account  duty,"  a  tax  which  may  be  very  roughly  described 
as  certain  fees  expanded  into  taxes,  still  appears  and  is  credited 


2o6  INTRODUCTION  TO  PUBLIC  FINANCE 

with  small,  but  from  year  to  year  diminishing,  sums  among 
the  budget  "  receipts  of  revenue."  This  duty  applies  only  to 
the  personal  property  of  persons  who  died  prior  to  1894,  in 
which  year  the  whole  group  of  these  death  duties  or  taxes  was 
thoroughly  revised.  These  receipts  of  revenue  are  only  the 
remnants  of  the  old  law.  Without  going  into  details  we  may 
explain  that  the  "  probate  duty  "  was  levied  on  the  estates  of 
personal  property  in  probate,  while  the  "  accounts  duty  "  was 
levied  on  gifts  inter-vivos  made  within  a  year  prior  to  death. 
Originally,  in  Great  Britain,  a  "  legacy  duty  "  was  imposed  on 
bequests  only  and  not  on  successions,  and  a  similar  tax  is  still 
imposed  on  any  personal  property  which  is  free  of  preexisting 
settlements.  (See  below.)  The  laws  of  that  country  relating 
to  "  settled  estates  "  seem  very  complicated  to  one  not  to  the 
manner  born.  Briefly  stated,  successions  to  beneficial  interests 
in  real  property  and  sometimes  in  personal  property  are  often 
fixed,  determined,  or  "  settled  "  in  such  a  manner  that  the  holder 
of  an  estate  has  sometimes  only  a  limited  power,  or  even  no 
power,  of  disposition  and  such  fixed  or  settled  succession  may 
be  for  many  years  or  generations.  When  such  a  "  settlement  " 
is  made  the  amount  "  settled  "  is  subject  to  a  tax  at  one  per 
cent  called  the  "  settlement  estate  duty."  But  this  is  incident 
to  the  settlement  only  and  does  not  affect  the  main  tax  or  chief 
death  duty.  That  duty,  the  great  revenue-producing  tax  in 
this  group,  for  Great  Britain,  is  the  "  estate  duty  "  established 
in  1894  and  revised  in  1907.  This  falls  on  the  entire  estate  left 
by  a  decedent.  The  rates  are  graduated  according  to  the  size 
of  the  estate,  and  rise  from  thirty  shillings  on  small  estates 
between  £100  and  £300  to  10  per  cent  on  estates  between 
£750,000  and  £1,000,000  with  additional  and  higher  rates 
graduated  up  to  15  per  cent  on  any  excess  over  £1,000,000. 
Property  passing  to  a  surviving  spouse  is  exempt.  Differ- 
entiation as  to  relationship  is  brought  about  by  additional 
taxes  on  collateral  heirs  and  legatees  in  the  form  of  two  other 
duties.  One  is  the  legacy  duty  mentioned  above  which  falls 
on  the  distributive  shares  of  personal  property  not  "  settled  " 
and  the  other  is  a  successions  duty  on  the  shares  received  as 


PROPERTY  TAXES  207 

"  settled  estates  "  of  real  estate,  of  leasehold  interests  (which 
are  numerous),  of  annuity  interests  in  land,  and  of  settled 
personalty.  The  rates  of  these  collateral  inheritance  taxes 
range  from  3  per  cent  for  brothers  and  sisters  and  their  descend- 
ants up  to  10  per  cent  for  very  remote  relatives  and  for  strangers 
to  the  blood. ^ 

Finally,  to  cover  property  held  by  "  bodies  corporate  or  in- 
corporate," which  might,  by  passing  without  probate,  escape 
the  taxes  on  occasion  of  death,  there  is  an  annual  tax  of  5  per 
cent  on  the  annual  value  of  property  so  held.  This  tax  is 
classed  with  the  "  death  duties." 

The  British  death  duties  form  a  rough  system.  While  the 
estate  duty  is  subject  to  the  same  criticism  which  is  made  be- 
low on  the  estate  tax  of  the  United  States,  that  criticism  ap- 
plies here  with  somewhat  less  force  by  reason :  first,  of  the  fact 
that  the  estate  tax  is  part  of  a  system,  and,  second,  of  its  deft 
adaptation  to  the  British  system  of  property  rights.  More- 
over, being  an  older  tax  than  that  of  the  United  States,  it  has 
shaken  down  into  place  and  settlements  are  made  with  refer- 
ence to  it. 

History  of  These  Taxes  in  United  States.  —  In  the  United 
States  probate  fees  have  played  an  insigniiicant  role  as  revenue. 
They  are  mainly  fees  proper,  not  taxes  in  the  guise  of  fees. 
Most  of  the  states  now  tax  inheritances,  that  is,  distributive 
shares.  Some  of  them  still  confine  the  tax  to  collateral  heirs 
and  legatees  only,  although  there  is  a  pronounced  trend  toward 
the  inclusion  of  direct  heirs  as  well.  Since  1916  the  federal 
government  has  had  an  estate  tax,  that  is,  one  based  on  the 
entire  estate  left  by  the  deceased.  It  has  on  several  occasions 
resorted  to  other  forms  of  death  duties  which  will  be  described 
below.  These  taxes  will  be  more  easily  understood  if  we  first 
discuss  their  theory. 

Sec.  16.  The  Theory  of  These  Taxes.  —  The  arguments  or 
theoretical  foundations  on  which  these  taxes  rest  seem  to  fall 
into  two  classes:  (i)  non-fiscal  or  socio-political,  and  (2)  fiscal. 

*  See  Max  West,  Inheritance  Tax,  for  more  details.  The  rates  given  above  are 
pre-war  rates.     For  war  rates  see  chapter  on  War  Finance. 


208  INTRODUCTION  TO  PUBLIC   FINANCE 

The  main  socio-political  argument  is  to  the  effect  that  the  so- 
called  right  of  bequest,  and  to  a  lesser  extent  the  right  of  suc- 
cession as  well,  is,  in  last  analysis,  merely  a  privilege  conceded 
by  the  state  or  by  government  to  the  individual,  and  is  not 
properly  a  right  or  at  least  not  a  right  correlative,  for  example, 
with  the  right  to  own  property.  The  privilege,  so  runs  the 
thought,  is  granted  for  the  purpose  of  stimulating  thrift  and 
industry  by  appealing  to  love  of  kin  and  to  the  natural  desire 
to  provide  for  those  dear  to  one.  It  is  in  any  case  a  revokable 
privilege  and  need  not  be  extended  beyond  what  is  deemed 
desirable  to  promote  those  ends  which  society  had  in  view  in 
granting  it.  Therefore,  the  privilege  is  subject  to  such  re- 
strictions or  limitations  as  may  be  deemed  wise.  There  is, 
underlying  this  argument,  an  assumption  that  all  property 
left  by  a  decedent  would  normally  revert  or  escheat  to  the 
state.  If,  then,  the  state  takes  part  only,  it  is  voluntarily  waiv- 
ing its  right  to  take  all.  This  theoretical  foundation  has  the 
approval  of  the  courts. 

A  special  socio-political  argument  runs  to  the  effect  that 
large  estates  are  socially  undesirable  and  that  the  inheritance 
tax  may  properly  be  directed  to  reducing  such  estates.  The 
argument  is  highly  political  and  is  capable  of  demagogical  appli- 
cation. 

The  fiscal  argument  falls  into  two  parts :  One  is  the  ease 
with  which  large  revenues  may  be  obtained  by  this  tax;  the 
other  is  that  an  inheritance,  while  not  in  all  cases  an  unex- 
pected windfall,  is  evidence  of  a  sudden  accretion  of  ability  to 
pay  a  tax.  Furthermore,  this  ability  arises  at  a  time  when, 
owing  to  the  unavoidable  circumstances  attendant  upon  the 
transfer  of  the  property  to  the  heir  or  legatee,  the  property  is 
possibly  put  into  more  liquid  and  freely  transferable  form.  In 
so  far  as  there  may  be  such  a  fluid  condition  the  payment  of 
the  tax  is  not  likely  to  create  a  serious  disturbance,  or  none 
much  greater  than  the  unavoidable  disturbance  which  death 
brings.  With  a  limitation,  applying  to  cases  where  direct  heirs 
have  had  an  expectation  of  succession,  the  tax  may  be  said  to 
fall  on  new  ability  and  at  a  time  when  it  is  convenient  to  pay  it. 


PROPERTY  TAXES  209 

Counter  Arguments.  —  The  force  of  these  arguments  is  great. 
But  there  are  some  arguments  advanced  on  the  other  side. 
Against  the  socio-political  argument  some  have  asserted,  dog- 
matically, that  inheritance  (and  even  bequest)  is  a  sacred  right, 
a  necessary  correlative  of  the  right  to  own  property.  Further- 
more, so  it  is  argued,  the  tax  distinctly  discourages  thrift  and 
accumulation  and  hence  by  curtailing  the  growth  of  capital 
is  socially  destructive.  It  is,  by  some,  assumed  that  the  tax  is 
paid  out  of  capital,  and  then,  being  spent  by  government  as  if 
it  were  income,  just  so  much  capital  is  directly  dissipated,  les- 
sening the  country's  capital.  Whether  inheritance  is  a  right 
or  a  privilege  is  a  matter  of  opinion.  But  the  force  of  the 
argument  as  to  the  dissipation  of  capital  depends  mainly  upon 
the  definition  of  capital.  There  may  be  cases  where  the  indi- 
vidual heir  or  legatee  makes  payment  by  a  permanent  sacri- 
fice of  capital.  But  in  many  more  cases  he  pays  by  a  temporary 
sacrifice  of  income.  Even  if  an  individual's  capital  is  curtailed 
there  is  no  equivalent  diminution  of  the  productive  capital  of 
the  community.  If  to  pay  the  tax  an  heir  sells  a  piece  of  land, 
the  land  is  still  in  existence  as  a  productive  agency,  although 
in  other  hands.  Moreover,  unless  the  funds  so  obtained  by 
the  government  are  wasted,  they  are  applied  to  the  needs  of  the 
many,  and  perhaps  to  greater  social  advantage  than  they 
would  have  been  if  used  by  the  individual. 

Tax  Evasion  as  Ground  for  Inheritance  Tax.  —  One  hears 
in  legislative  halls  some  rather  curious  arguments,  one  of  which 
is  so  persistent  as  to  be  worthy  of  mention.  That  one  is  to 
the  effect  that  "  probably  the  deceased  has,  during  his  life- 
time, evaded  or  escaped  some  of  the  just  taxes  on  his  property, 
and  now  that  death  brings  to  light  what  he  possesses,  the 
government  has  a  fine  chance  to  get  even."  In  an  inheritance 
tax  law  of  one  American  state  it  was  actually  provided  that 
if  the  heirs  could  prove  that  the  property  they  were  to  receive 
had  been  fully  taxed  in  past  years  they  would  be  exempt  from 
the  tax,  otherwise  they  must  pay.  This  is  a  poor  apology  for 
an  argument,  for  the  punishment  falls  on  the  innocent  heir  or 
legatee  and  not  on  the  guilty  dead.     Moreover,  a  government 


2IO  INTRODUCTION  TO  PUBLIC   FINANCE 

should  be  strong  enough  to  collect  its  own  tribute  at  all  times. 
Generally,  however,  it  is  the  revenue  so  easily  to  be  had  which 
appeals  to  the  legislator  as  an  all-sufficient  reason  for  the  impo- 
sition of  the  tax. 

Sec.  17.  The  Rates  of  These  Taxes. — These  taxes  are 
usually  progressive.  Where  they  fall  on  the  distributive  shares 
they  are  progressive  in  two  ways,  once  with  the  size  of  the  share 
or  amount  of  property  passing  to  a  given  person,  and  again 
with  the  remoteness  of  the  relationship  of  the  beneficiary  to 
the  deceased.  Estate  taxes  of  course  can  be  progressive  in 
one  way  only.  Progression  based  on  relationship  is  justified 
under  both  of  the  arguments  which  support  these  taxes.  For 
a  man  clearly  does  not  cherish  the  privilege  of  bequeathing  his 
property  to  a  stranger  to  the  blood  as  highly  as  he  does  that  of 
leaving  it  to  his  wife  or  son.  Looking  at  it  from  the  point  of 
view  of  the  heir  or  recipient  a  bequest  from  a  distant  relative,  or 
from  a  stranger  to  the  blood  is  more  of  a  windfall  than  is  a 
direct  inheritance,  and  one  feels  the  tax  less  in  consequence. 
Again,  the  direct  heirs  have  already  been  living  in  many  cases 
in  expectation  of  the  estate  and  the  accretion  of  ability  to  pay 
is  less  than  in  the  case  of  a  collateral  heir  or  a  stranger  to  the 
blood. 

The  forms  of  the  rate  schedules  are  too  numerous  to  be 
described  here  in  detail.  The  main  features  only  can  be  pre- 
sented. The  heirs  or  legatees  fall  naturally  into  three  main 
classes :  (i)  the  spouse  and  the  direct  heirs,  sometimes  in  the 
ascending  line  as  father,  grandfather,  as  well  as  those  in  the 
descending  line,  as  son,  grandson,  (2)  collateral  heirs  to  all 
degrees,  and  (3)  strangers  to  the  blood.  Brothers  and  sisters, 
however,  are  often  placed  in  a  preferred  or  favoured  class  of 
collaterals  to  which  nephews  and  nieces  are  added.  Second 
cousins  also  often  come  in  a  separate  class.  Generally  the 
more  remote  collaterals,  that  is,  beyond  second  cousins,  are 
treated  as  are  strangers. 

The  widow  (or  widower)  is  usually  again  preferred  among 
the  direct  heirs,  not  so  much  by  lower  rates  as  by  a  larger  free 
or  exempt  estate  and  larger  deductions  or  abatements.     Thus 


PROPERTY  TAXES  211 

the  widow  may  receive  a  deduction,  amounting  to  exemption 
if  her  estate  is  less  than  the  deduction,  of  say  $25,000,  while 
the  son  or  daughter  get  only  a  $10,000  deduction  and  other 
direct  heirs  still  less.  The  intricate  questions  of  joint  estates 
and  community  property  and  the  common  practice  of  carrying 
property  in  the  wife's  name  complicate  the  whole  problem. 
This  is  a  matter  we  cannot  enter  into  here.  The  exemptions  or 
deductions  granted  other  classes  diminish  as  the  relationship 
to  the  deceased  grows  more  distant. 

The  progression  in  the  rates  is  most  often  in  coarse  grades. 
There  is  usually  a  series  of  grades  by  amount  for  each  class  of 
beneficiaries  in  the  inheritance  tax.  Thus  for  direct  heirs  the 
rates,  modified  in  turn  by  the  deductions,  may  run  from  i  per 
cent  to  15  per  cent;  for  brothers  and  sisters,  nephews  and 
nieces,  from  3  per  cent  to  25  per  cent ;  for  uncles,  aunts,  and 
cousins,  from  4  per  cent  to  30  per  cent ;  and  for  other  collaterals 
and  strangers,  from  5  per  cent  to  30  per  cent.  The  progression 
within  each  class,  that  is,  the  progression  rising  with  the  amount 
of  property  received,  may  be  degressive  in  form.  That  is,  each 
higher  rate  may  apply  only  to  the  excess  over  the  amount  at 
wMch  the  preceding  grade  stopped.  The  exemption  being 
deducted,  no  matter  how  large  the  estate  or  share,  also  has  the 
effect  of  bringing  about  progression.  While  progression  is 
clearly  justified  in  the  case  of  a  strict  inheritance  tax,  it  often 
works  out  so  badly  in  the  case  of  an  estate  tax  that  its  appli- 
cability here  at  all  is  dubious.  Why,  for  example,  should  the 
heir  to  $10,000  from  a  million  dollar  estate  bear  the  burden  of  a 
higher  rate  than  the  heir  to  $10,000  from  an  estate  of,  say,  $20,- 
000?  If  the  rate  of  the  estate  tax  were  proportional  this 
difficulty  would  disappear.  The  fact  is  that  the  estate  tax  is  a 
bungling  contrivance  at  best  and  should  give  way  to  the  inheri- 
tance tax  proper.  This  statement  appHes  with  full  force  to  the 
United  States.  Possibly  in  England,  owing  to  her  peculiar 
property  laws,  to  the  so-called  settlement  of  estates,  and  the 
hke,  the  estate  tax  is  a  better  tax. 

How  heavy  the  estate  and  inheritance  taxes  may  be  made 
is  a  very  interesting  problem.     These  taxes  are  of  a  kind  that 


212  INTRODUCTION  TO  PUBLIC  FINANCE 

can  always  be  evaded,  although  the  evasion  may  cause  serious 
inconvenience.  The  usual  form  of  evasion  is  a  transfer  before 
death.  The  utmost  ingenuity  is  exercised  by  lawmakers  and 
administrative  tax  officials  to  stop  this  gap.  Any  gifts  in  con- 
templation of  death  are  considered  taxable,  but  not,  of  course, 
until  after  death.  But  what  is  a  gift  in  contemplation  of  death  ? 
Ingenious  lawyers  can  cover  up  the  transfer  in  a  thousand  dif- 
ferent ways,  some  of  which  defy  detection.  It  is  arbitrary  to 
say  that  gifts  within  a  set  period,  say,  two  years,  or  five  years, 
prior  to  death,  are  to  be  considered  made  in  contemplation  of 
death,  yet  some  laws  do  so  provide.  Usually,  however,  this 
provision  is  inserted  merely  to  shift  the  burden  of  proof  from 
the  government  to  the  beneficiaries.  Moreover,  there  is  always 
the  possibility  that  the  tax  may  check  accumulation.  The 
consensus  of  opinion  seems  to  be  that  a  limit  of  25  per  cent  or 
30  per  cent  reached  only  for  large  estates  going  to  collateral 
heirs  is  indicated  by  experience  and  by  reason.  The  problem 
is  complicated  by  the  fact  that  the  higher  rates  fall  on  remote 
heirs  or  legatees.  One  of  the  lesser  purposes  of  the  tax,  which 
is  to  force  the  subdivision  of  estates,  is  thus  partly  defeated. 
For  the  effect  of  such  high  rates  on  collaterals  is  in  a  measure 
to  keep  the  property  in  the  family,  that  is,  among  the  direct 
heirs  who  pay  the  lower  rates. 

Frequency  of  the  Occasion.  —  The  succession  taxes  are  taxes 
"  on  occasion,"  that  is,  of  death,  and  there  is  no  necessary 
attempt  at  equality,  that  is,  equality  between  families.  In 
some  famihes  death  comes  at  frequent  intervals,  in  others  of 
tougher  fiber  the  life  of  each  generation  is  long.  In  the  first 
group  the  "  occasion  "  for  the  imposition  of  the  tax  recurs  at 
frequent  intervals,  in  the  other  it  comes  infrequently.  In  the 
first  case  a  family  estate  might  be  rapidly  depleted  by  recurrent 
inheritance  taxes.  Some  estate  tax  laws  recognise  this  and  for- 
bid the  reimposition  of  the  tax  more  than  once  in  say  five  years, 
upon  the  same  estate  or  property. 

An  Insurable  Risk.  —  Where  an  income  tax  has  been  long 
established  and  there  is  no  prospect  of  its  repeal,  well-to-do 
men  sometimes  provided  for  it  by  carrying  insurance  on  the 


PROPERTY  TAXES  213 

life  of  the  owner  of  property.  It  is  obvious  that  the  tax  is  a 
loss,  certain  to  occur  at  some  time,  but  uncertain  as  to  time, 
and,  among  a  group  of  property  owners,  uncertain  as  to  whom 
it  will  fall  on  first,  and  is,  like  the  death  which  occasions  it, 
a  properly  insurable  risk.  Should  the  policy  be  written  to 
insure  against  any  inheritance  tax  whatever,  be  it  large  or 
smaU,  naturally  the  premiums  would  have  to  be  larger  than  life 
insurance  premiums,  for  a  sum  definite.  For  economy  the 
insured  must  himself  carry  the  risk  of  increased  rates  of  tax. 
Where  family  pride  requires  that  the  family  estate  shall  pass 
unimpaired  and  the  owner  regards  himself  as  only  a  sort  of 
life  tenant  he  may  feel  in  duty  bound  to  sacrifice  from  his  own 
income  during  hfe  enough  to  pay  the  premiums  on  a  life  insur- 
ance policy  large  enough  to  cover  the  tax.  Possibly  this  ex- 
plains why  the  practice  of  insuring  against  the  inheritance  tax 
is  prevalent  in  England.  There  is,  moreover,  a  marked  prac- 
tical advantage  in  having  a  sum  available  in  cash  immediately 
after  death  to  pay  the  tax  with. 

In  the  United  States,  although  insurance  companies  use  the 
inheritance  tax  or  the  estate  tax  as  "a  talking  point "  in  selling 
insurance,  the  above  described  practice  has  not  taken  deep  root. 
This  may  be  in  part  due  to  the  absence  of  "  settled  estates," 
and  to  the  uncertainty  as  to  how  much  one's  fortune,  and 
hence  the  tax,  may  amount  to.  These  two  obvious  considera- 
tions call  attention  at  once  to  the  fundamental  fact  that  there 
is  always  a  better  set  of  determinants  as  to  whether  one 
should  carry  life  insurance  or  not  than  this  tax.  These  de- 
terminants may  indicate  insurance,  tax  or  no  tax.  By  itself 
the  tax  is  an  insufiicient  reason  for  insurance  as  most  well- 
to-do  men  can  increase  their  fortunes  faster  than  by  insurance 
saving. 

In  passing  it  is  well  to  note  that  insurance  carried  by  a  dece- 
dent and  payable  to  a  named  beneficiary  is  not  normally  sub- 
ject to  an  estate  tax  nor  to  an  inheritance  tax  unless  the  law  so 
specifies.  In  some  cases  the  law  does  so  specify  as  to  large 
amounts  of  insurance.  The  federal  estate  tax  law  so  specifies. 
Presumably,  too,   the  use  of  any  considerable  part  of  one's 


214  INTRODUCTION  TO  PUBLIC  FINANCE 

estate  to  buy  insurance  for  specified  beneficiaries  would  con- 
stitute a  transfer  in  contemplation  of  death. 

Sec.  i8.  United  States  Federal  Inheritance  Taxes. — The 
federal  government  in  the  United  States  has  resorted  to  in- 
heritance taxes  on  several  occasions.  It  has  used  the  tax  three 
times  as  a  war  tax.^  From  1789  to  1802  there  was  a  stamp  tax 
on  inventories,  receipts  of  legacies,  and  on  probates  of  wills  and 
letters  of  administration.  From  1862  to  1870  there  was  a 
"  legacy  tax  "  and  a  "  successions  tax  "  together  with  stamp 
taxes  on  probate  documents.  The  legacy  tax  was  on  shares  of 
personal  property  and  was  graduated  according  to  kinship. 
The  later  (1864)  succession  tax  covered  real  estate.  In  1898  an 
inheritance  tax  was  imposed  which  lasted  until  1902.  It  was 
graduated  both  as  to  kinship  and  amount.-  Finally,  we  have 
since  191 6  a  federal  estate  tax. 

The  present  federal  estate  tax  is  strictly  an  estate  tax  levied 
on  the  entire  "  net  estate  of  the  decedent  "  and  has  no  regard 
for  the  distributive  shares.  Gifts  inter-vivos  or  transfers  made 
within  two  years  of  death  are  taxable  as  presumptively  made  in 
contemplation  of  death.  Estates  of  residents  enjoy  an  exemp- 
tion of  $50,000,  but  property  within  the  United  States  left  by 
non-residents  is  taxable  in  full.  The  rates  are  graduated  from 
I  per  cent  on  the  first  $50,000  over  the  exemption  to  25  per 
cent  on  the  excess  over  $10,000,000.  Any  items  of  property 
once  subjected  to  the  estate  tax  are  not  again  taxable  there- 
under within  five  years.  A  gravely  unjust  feature  of  the  law 
is  the  thrusting  of  the  burden  upon  the  residuary  legatee,  if 
there  be  one,  who  ultimately  bears  the  whole  tax. 

Conflict  between  Federal  and  State  Taxes.  —  There  is  serious 
conflict  between  this  tax  and  the  state  inheritance  taxes.  The  con- 
flict is  not  merely  in  the  invasion  of  a  field  already  fairly  well 
occupied  by  the  states,  but  directly  in  the  application  of  the  law. 
The  federal  tax  is  computed  on  the  entire  estate  of  the  deceased 

'  For  details  see  West,  Inheritance  Tax,  pp.  87  £f. 

2 The  difficulty  over  the  term  "estate"  commented  on  above  arose  in  the  case 
of  this  law.  At  first  it  was  interpreted  administratively  as  meaning  that  the  tax 
was  to  be  computed  on  the  estate  of  the  decedent.  But  the  Supreme  Court  finally 
ruled  (Knowlton  vs.  Moore,  178  U.  S.  41)  that  it  was  strictly  on  the  shares. 


PROPERTY  TAXES  21 5 

and  does  not  take  into  consideration  the  tax  to  be  le\ded  on 
the  shares.  Neither  do  the  state  tax  inheritance  laws,  for 
the  most  part,  allow  for  deduction  of  the  federal  tax,  each 
share  being  taxed  in  full  as  left  by  the  deceased  or  as  it  would 
have  been  without  the  federal  tax.  This  ruling  is,  however, 
being  modified  and  probably  will  have  to  give  way.  If  it  does, 
it  still  more  clearly  shows  the  encroachment  of  the  federal  law 
upon  the  revenues  of  the  state. 

Constitutionality  of  Federal  Tax.  —  There  is  doubt  as  to  the 
constitutionaHty  of  this  tax.  Under  the  Constitution  all  law 
relating  to  property  rights  and  in  regard  to  the  devolution  of 
property  is  state  law.  Congress  may  not  deprive  the  states 
of  the  power  to  establish  the  right  of  succession  and  of  bequest, 
nor  can  it  limit  or  abridge  those  powers.  The  power  to  tax  is 
the  power  to  destroy.  If  by  taxation  Congress  takes  away  part 
or  all  of  the  value  of  property  left  by  a  decedent  it  takes  the  ker- 
nel of  the  state's  right  and  leaves  the  shell  only.  When  the 
inheritance  tax  of  1898  was  before  the  courts  it  was  first  decided 
that  the  tax  was  upon  the  distributive  shares,  and  was  a  "  burden 
cast  upon  the  recipient  and  not  upon  the  power  of  the  state  to 
regulate."  The  whole  argument  implies  that  a  tax  imposed 
on  the  net  estate  of  the  decedent  and  thus  directly  impinging 
on  the  determination  of  the  devolution  would  be  invalid  as 
limiting  the  power  of  the  state  in  its  own  proper  field.  There 
is  a  distinct  difference  between  this  estate  tax  and  one  on  the 
transfer  or  right  to  receive  property  after  the  state,  by  exercise 
of  its  powers,  has  established  the  right.  If,  as  may  be  con- 
tended, the  estate  of  a  deceased  person  passes  first  to  the  state 
and  remains  for  a  time  in  custody  of  the  state,  the  federal  tax 
is  a  direct  attack  on  the  state  itself.  If,  on  the  other  hand,  the 
estate  of  the  deceased  is,  on  the  very  instant  of  death,  broken 
up  into  the  several  estates  of  the  heirs  and  legatees,  it  breaks 
up  only  by  virtue  of  and  in  accordance  with  the  laws  of  the 
state,  which  are  nullified  or  vitally  amended  by  the  interposi- 
tion of  the  federal  tax  and  the  seizure  by  the  federal  government 
of  part  of  the  estate  precedent  to  the  distribution.  The  argu- 
ment in  Knowlton  vs.  Moore  (178  U.  S.  41)  rests  wholly  on  the 


2l6  INTRODUCTION  TO  PUBLIC   FINANCE 

fact  that  having  decided  first  that  the  tax  before  the  court  fell 
on  the  distributive  shares  the  court  could  then  claim  that  the 
state  had  finished  the  exercise  of  its  reserved  powers  and  there 
was  no  barrier  for  Congress  to  step  in  and  tax.  But  the  matter 
is  wholly  different  where  the  tax  is  on  the  estate,  before  dis- 
tribution or  while  in  the  custody  of  the  state.  Probably  the 
courts  will  be  called  upon  to  pass  upon  this  point. 

The  commonwealth  inheritance  taxes  in  the  United  States 
need  no  special  description.  They  are  strictly  upon  the  dis- 
tributive shares  and  sufficiently  covered  by  the  general  de- 
scription above. 

Conflict  of  Tax  Laws.  —  But  there  is  one  point  of  importance 
and  that  is  double  taxation  or  taxation  of  the  same  property 
by  two  states.  The  states  generally  claim  the  right  to  tax  all 
the  property  passing  under  their  jurisdiction.  After  much 
litigation  and  by  gradual  concessions  they  now  for  the  most 
part  consider  real  estate  as  taxable  only  where  it  lies,  and  not 
at  the  residence  of  the  deceased  if  that  be  in  another  state. 
But  as  to  personal  property  there  is  no  agreement.  Almost  all 
the  states  insist  (i)  that  personal  property  takes  its  situs  at 
the  residence  of  the  owner  deceased,  and  yet  (2)  that  any 
personal  property  like  stocks  and  bonds  found  within  a  state's 
confines  is  taxable  there.  The  inconsistency  does  not  prevent 
one  state  from  asserting  both  principles.  Thus  in  the  case  of 
one  decedent  resident  in  the  state  his  shares  of  stock  in  a  cor- 
poration outside  the  state  are  taxed  as  part  of  the  estate  pass- 
ing within  the  state,  while  in  the  case  of  another  decedent, 
non-resident,  shares  of  stock  in  a  corporation  within  the  state 
are  taxable.  So  the  same  shares  may  be  taxed  in  two  different 
states.  A  working  basis  might  be  reached,  as  one  has  been 
for  real  estate,  but  for  the  very  practical  reason  that  so  many 
rich  men  live  in  the  great  financial  centres.  New  York,  for 
example,  does  not  like  to  contemplate  surrendering  the  taxes 
on  all  the  property  of  her  rich  residents,  including  their  invest- 
ments in  other  states.  The  other  states  are  equally  loath  to 
lose  the  taxes  on  shares  of  stock  and  the  like,  representing 
property  within  their  bounds.  ^  Probably  the  best  principle  is 


PROPERTY   TAXES  21 7 

the  personal  or  residence  one.  Yet  for  the  property  tax  the 
reverse  rule  is  adopted. 

This  practical  difficulty  has  given  occasion  for  the  suggestion 
that  since  the  geographical  boundaries  of  the  states  are  for 
property  and  taxation  somewhat  artificial,  the  administration 
and  collection  of  the  inheritance  tax  should  be  transferred  to 
the  federal  government,  the  proceeds  to  be  distributed  on  some 
agreed  basis,  such  as  population,  property,  or  needs  in  some  one 
line  as  schools.  Obviously  this  means  a  uniform  system 
throughout  the  country. 

Sec.  19.  Administration.  —  There  are  a  few  other  features 
of  the  inheritance  taxes  which  may  be  briefly  mentioned. 
These  taxes  are  strictly  taxes  "  on  occasion,"  and  the  occasion 
is  beyond  administrative  control.  The  yield  is  irregular  and 
cannot  be  entered  in  a  budget  preestimate  save  by  guess. 

Owing  to  the  necessity  for  legal  sanction  for  the  passing  of 
property,  the  administration  of  the  tax  is  largely  bound  up 
with  the  courts,  and  becomes  a  part  of  probate  procedure. 
But  the  probate  judges  are  not  ordinarily  versed  in  taxation. 
For  protection  of  the  revenues  the  tax  administrative  authori- 
ties have  to  enter  in  and  especially  to  take  part  in  the  fixing  of 
valuations.  A  valuation  sufficiently  accurate  to  satisfy  the 
court  that  each  heir  or  legatee  receives  his  due  share  is  often 
woefully  inadequate  to  protect  the  revenue  of  the  government. 
A  probate  court  is  not  necessarily  concerned  at  all  with  the 
value  of  the  property  which  passes  to  the  residuary  legatee. 
But  the  tax  administration  is.  Hence  inheritance  tax  ap- 
praisers are  required,  working  under  the  supervision  of  the 
regular  tax  department. 

It  will  serve  to  clarify  the  description  above  if  we  give  a 
concrete  example.  The  following  tables  give  the  California 
classes  and  rates  and  an  illustration  of  their  application. 

The  following  example  will  indicate  the  proper  method  of 
computing  the  tax,  under  the  above  schedule  of  rates. 


2l8 


INTRODUCTION  TO  PUBLIC  FINANCE 


1—1 

03 


o  o 

to   O 

s 

«i   O 

u 

^    ^ 

to 

o 

o 

fe     '-' 

N 

rO 

fO 

1 

a, 

o  o 

O   0 

q§ 

s . 

O 

lO 

o 

8°- 

V        HI 

<N 

Ol 

<^ 

B< 

ifif^ 

o 

U 

o 
■"  o 

•M, 

z 

o  o 

■u 

< 

o  o 
O-  o 

^    o 

>r) 

o 

>o 

3 

o  "^ 

fe    -" 

M 

(N 

<N 

H 

ri6» 

ft< 

HH 

«» 

o 

O 

■"  o 
o  o 

w 

o.  o" 

^    t^ 

<M 

lO 

o 

p 

o  o 

K 

M 

M 

(N 

< 

ft. 

> 

o 

«# 

2o 

0   0 

a 

o> 

o 

m 

< 

Pi 

6  2, 

ft. 

M 

tH 

b< 

O 

! 

o 
■"  o 

"S 

II 

vO 

00 

o 

s 

ft. 

^ 

-  ^  M 

^3^0        o 

1 

^       M 

rO 

^ 

to 

ca'J 

2 

t,         •         ■ 

o 

M 

•S  8  8 

S  -^  d" 

H 

CJ       M 

Q 

Q 

8 

,i^ 

^m^ 

Q 

Q 

M 

o 

8 

M 

r- 

^^ 

m^ 

S 

^     "" 

H 

3  -^  ^ 

1 

:5  7^  -^ 
^^6 

bi 

O 

^r  "Td  _L 

1       1      c3 

■4-J 

--!      "I      "H 

2 
O 

g    &    o 

2  SI,  ° 

f-i 

.-  o  c 

S^       tH     -O 

c 

rt    rt  _-j-[ 

< 

z  w 

^  -^  ^ 

rt    rt    y 

^  °  s 

1-4     •— '        C/] 

o 

"o   to    O 

i-H  in 

O     ^     =! 

-u 

«-t-H           -^      >^ 

^    \.^ 

1h 

o    >,■$ 

O  H 

tU     cfi   r^ 

t^  j-T 

o 

.-S   o 

§2 

en 
en 

<: 

^  rt    3    (J 

"^  -S  J:;  -^ 

OJ       OJ       rH 

-j-i     r-*     '::' 

tn  t:^   o   ,• 

o    o    o    M 
^    C    ?:    OS 

O    03    o  13 

-4-* 

1"^ 

<"    e    O    f^ 

^   o   c   o 

U 

w 

m 

P 

o 

PROPERTY  TAXES 


219 


EXAMPLE 


Name  and 
Relationship 

Inheritance  or 
Transfer 

Computation 

Tax 

Ann  Smith,  widow 

$1,074,000.00 

$24,000  exempt 

1,000  at    1% 

25,000  at    2% 

50,000  at    4% 

100,000  at    7% 

300,000  at  10% 

500,000  at  12% 

$      10 

500 

2,000 

7,000 

30,000 

60,000 

30,000.00 

74,000  at  15% 

11,100 

Henry  Smith,  adult 

$110 

,610.00 

son 

10,500.00 
8,000.00 

$10,000  exempt 

15,000  at    1% 

5,000  at    2% 

$2,000  exempt 
8,500  at    3% 

$150 
100 

Janet  Smith,  sister 
William  Smith,  uncle 

250.00 
255-00 

Ernest  Harmon, 

2,500.00 

$1,000  exempt 
7,000  at    4% 

280.00 

stranger 

$  500  exempt 
2,000  at    5% 
Total  tax 

1 00.00 

Value  of  estate 

$1,125,000.00 

$111 

,495.00 

CHAPTER   IX 

PERSONAL   TAXES:    THE   POLL   TAX   AND   THE 
INCOME   TAX 

Section  i.  Poll  or  Capitation  Taxes.  —  The  simplest  form 
of  personal  taxation  is  the  collection  of  an  equal  contribution 
from  each  subject  by  a  poll  or  capitation  tax.  Such  a  tax  can- 
not be  large,  because  if  it  were  it  would  impose  a  burden  beyond 
the  ability  of  the  poor  to  carry.  A  poll  tax  by  itself  can  rarely 
be  made  to  yield  sufficient  revenue  for  the  support  of  the  govern- 
ment. A  uniform  per  capita  tax  standing  alone  is  not  just 
unless  all  wealth  is  equally  distributed,  and  only  in  very 
primitive  communities  is  such  equality  of  wealth  found. 
Hence  it  is  that  the  poll  tax  now  possesses  little  more  than  an 
historical  interest. 

In  the  United  States  the  poll  tax  has  been  extensively  used 
in  the  past.  It  is  now  being  slowly  but  steadily  abandoned. 
Only  ten  years  ago  it  was  found  in  some  form  in  nearly  every 
state  in  the  Union.  To-day,  1920,  its  use  is  actually  pro- 
hibited by  constitutional  law  in  some  states.  It  began  as  a 
distinct  commutation  for  personal  services  which  were  originally 
required  of  the  citizen,  such  as  work  on  the  roads,  service  in 
the  militia,  or  special  services  for  schools. 

Its  use  as  a  road  tax  is  interestingly  illustrative  of  the  thought 
underlying  its  adoption.  In  the  beginning  work  on  the  roads 
was  considered  to  be  a  duty  in  which  every  one  should  share. 
So  every  able-bodied  man  was  expected  to  turn  out  with  pick 
and  shovel,  or  to  bring  his  team,  and  to  work.  But  of  course 
there  were  some  who  wanted  to  be  excused,  or  whose  soft  hands 
or  weak  backs  were  not  effective.  These  were  allowed  to  pay 
for  substitutes.     If  on  the  average  it  took,  say,  two  days'  work 

220 


PERSONAL  TAXES:    POLL  AND   INCOME  TAXES      221 

by  each  able-bodied  man  in  the  community  each  year  to  keep 
up  the  roads,  then  two  days'  pay  of  common  labor  would  be 
equivalent  in  money,  as  commutation  of  work.  In  some  such 
way  were  the  rates  fixed.  As  time  passed  better  roads  were 
needed,  and  work  on  the  roads  like  every  other  kind  of  work 
became  specialized.  The  roads  required  continuous  care. 
Working  on  the  roads  ceased  to  be  demanded  as  a  common 
duty.  Meanwhile  some  citizens  had  grown  wealthy  and  it 
seemed  fair  that  they  should  pay  more  than  others.  So  while 
the  old  tax  remained,  the  large  new  costs  were  met  from  the 
general  taxes. 

Again,  in  the  days  when  the  "  school  marm  boarded  round  " 
first  with  one  family,  then  with  another,  it  seemed  quite  natural 
to  collect  a  poll  tax  to  raise  money  for  her  meagre  cash  salary. 
This  tax  was  aimed  primarily  at  those  who  did  not  contribute 
in  other  ways  as  by  board  to  keeping  the  schools  going.  Hence 
the  school  poll  tax.  When,  again,  voluntary  servdce  in  the 
militia  was  the  "  proper  thing,"  it  seemed  quite  natural  to  say 
to  those  who  stayed  at  home  and  would  not  drill,  You  shall 
pay  something  in  commutation  of  this  public  service.  Then 
we  had  the  military  poll  tax. 

But  the  commutation  idea  was  not  the  sole  origin  of  the  poll 
tax.  Quite  frequently  the  poll  tax  was  aimed  broadly  at  those 
who  having  no  taxable  property  "  ought  to  pay  something 
an^-way."  So  it  became  in  the  end  a  widely  accepted  doctrine 
in  democratic  communities  that  every  one  should  pay  a  uniform 
poll  tax  to  start  with  and  more  if  some  other  test  showed  he 
could  do  so.  On  some  such  theory  also  rested  the  poll  taxes 
directed  specifically  at  certain  classes  of  aliens. 

Still  another  type  of  poll  tax  had  its  origin  in  a  sort  of  fee. 
This  may  be  illustrated  by  the  typical  instance  of  the  California 
hospital  poll  tax.  During  the  gold  rush  many  men  arrived 
in  San  Francisco  ill  with  diseases  contracted  during  the  long 
voyage.  A  hospital  was  needed.  What  more  natural  than  to 
charge  every  passenger  a  hospital  fee  or  poll  tax?  To  insure 
collection  the  steamship  had  to  pay  it,  but  it  was,  of  course, 
collected  by  the  steamer  as  part  of  the  fare.     But  sick  men  with 


222  INTRODUCTION    TO  PUBLIC   FINANCE 

no  friends  to  care  for  them  turned  up  in  every  county  and  soon 
there  was  a  "  hospital  poll  tax  "  collected  in  every  county 
annually  to  support  the  county  hospital,  which  for  a  time 
served  as  poorhouse  as  well.  In  this  class  we  might  include 
the  voter's  registration  fee  or  poll  tax.  Yet  this  is  possibly 
better  explained  as  the  converse  of  the  slogan  "  no  taxation 
without  representation,"  that  is,  "  no  representation  without 
taxation,"  a  dogma  not  so  popular  as  it  once  was. 

The  poll  tax  was  usually  levied  on  adult  males  in  the  prime  of 
life ;  that  is,  on  males  between  twenty  or  twenty-one  years 
of  age  and  not  over  forty-five  or  sixty  years.  Wives  and  de- 
pendents were  excluded.  This  selection  is  largely  due  to  the 
commutation  idea.  In  some  of  the  older  commonwealths, 
dating  from  colonial  times,  the  poll  tax  was  made  more  uni- 
versal and  was  combined  with  the  property  tax.  Thus  every 
taxable  person  was  rated  for  his  poll  as  though  it  were  prop- 
erty at  a  sum  which  multiplied  by  the  tax  rate  on  property 
would  result  in  a  uniform  poll  tax.  When  so  used  it  would 
normally  reach  women  who  had  independent  property  as  well 
as  males,  but  was  not  other\vise  applied  to  women. 

In  many  countries  the  poll  tax  evolved  into  a  tax  which  took 
cognizance  of  differing  ability  to  pay.  One  such  tax  changed 
from  a  simple  poll  tax  to  one  in  which  the  rates  differed  for  dif- 
ferent social  classes,  the  nobles  of  different  ranks,  the  clergy, 
the  bourgeoisie,  the  artisans,  and  the  peasants ;  then,  later, 
it  was  made  to  vary  also  with  real  differences  in  income.  Finally 
it  became  an  income  tax.  This  is  the  accepted  history  of  the 
Prussian  income  tax.  But  in  the  United  States  the  poll  tax 
did  not  evolve  at  all.  Rather,  it  stagnated  and  decayed.  To 
change  the  figure  of  speech,  the  poll  tax,  where  it  survives  to-day, 
stands  as  a  decaying  monument  set  up  in  the  past ;  and  like  the 
gravestones  in  old  cemeteries  these  remaining  poll  taxes  are 
moss-grown  and  leaning,  passing  memorials  to  dead  democratic 
institutions  of  the  past. 

Inequality  of  Poll  Taxes.  —  Practically  the  returns  of  the  poll 
tax  are  insignificant.  The  expense  of  collection  is  relatively 
large.     Its  administration  encounters  friction  and  causes  opposi- 


PERSONAL  TAXES:    POLL  AND   INCOME  TAXES      22$ 

tion.  Popular  thought,  not  realising  that  justice  and  equality 
in  taxation  can  be  tested  only  by  the  whole  complex  of  taxes, 
seizes  on  the  inequality  which  might  be  a  good  ground  for  objec- 
tion if  the  tax  stood  alone,  and  holds  it  to  be  unjust.  It  is 
being  repealed  just  as  fast  as  the  revenues  it  yields  can  be  spared. 
Too  often  the  repeal  is  not  accompanied  by  any  new  taxes 
reaching  the  same  sort  of  ability. 

Sec.  2.  Personal  Income  Tax. — The  most  advanced  form 
of  personal  taxation  is  a  personal  income  tax.  Most  income 
taxes  are  personal  in  intent.  Yet  it  is  possible  to  frame  an  in- 
come tax  which  is  non-personal  in  effect,  a  tax  on  income  with- 
out special  reference  to  its  recipient. 

When,  however,  the  "  great  merits  "  or  the  "  justice  and 
equality  "  of  an  income  tax  are  extolled  it  is  generally  a  personal 
income  tax  that  is  meant.  A  tax  on  income  "  from  property," 
on  income  in  process  of  payment,  on  income  where  you  can  catch 
it  without  bothering  the  income  recipient,  might  be  regarded 
as  a  complex  of  taxes  rather  than  as  an  income  tax  proper. 

The  taxation  of  income  is  old.  It  antedates  the  Christian  era 
in  many  countries.  How  old  it  is  we  do  not  know.  There 
are  records  of  it  in  the  history  of  India  and  we  find  the  funda- 
mental concept  of  income  taxation  recorded  in  many  places  in 
the  Bible. ^  The  Jewish  tithe  was  a  simple  and  very  natural 
form  of  the  income  tax.^ 

In  primitive  communities  the  concept  of  income  was  simple. 
It  included  the  yield  of  the  fields  and  the  increase  in  flocks 
and  herds.  The  intricate  concept  of  net  income  did  not,  in 
those  days,  arise  to  plague  taxpayers  and  tax-collectors.  All 
there  was  to  do  was  to  measure  the  grain  on  the  threshing  floor 
and  count  the  lambs,  calves,  or  colts.  No  certified  public 
accountant  or  expert  government  inspector  was  needed. 

1  See  citation  from  Laws  of  Manu,  p.  4.  Deuteronomy  18:4;^  26:12.  In 
Deuteronomy  26 :  5-1 1  we  fmd  the  ancient  form  of  taxpayer's  oath,  which  sounds  as 
though  it  might  be  more  efifective  than  the  modern  one  taken  before  a  notary.  See 
also  Lev.  28:32. 

2  The  ancient  taxes  were  originally  pure  income  taxes  in  underlying  concept. 
But  they  were  attached  to  income  from  land,  which  was  in  early  days  the  sole  or 
the  most  conspicuous  form  of  income.  When  other  taxes  arose  the  old  tax  on  the 
produce  of  the  soil  and  on  Qocks  and  herds  was  gradually  transformed  into  a  land  lax. 


224  INTRODUCTION  TO   PUBLIC   FINANCE 

Modern  Concept  of  Income  Intricate.  —  In  modern  times, 
despite  the  fact  that  most  people  think  about  income  as  a  very- 
simple  thing,  the  concept  is  really  one  of  the  most  intricate  in 
the  whole  field  of  business  and  of  economics.  The  ancient 
farmer  regarded  the  grain  on  the  threshing  floor  as  all  income. 
The  modern  farmer  has  to  find  out  first  what  he  can  sell  his  grain 
for  in  money.  Then  he  finds  out  the  money  cost  of  seed,  fertil- 
iser, labour,  tools,  machinery,  depreciation  of  barns,  and  many 
other  expenses.  Taking  the  latter  from  the  former  he  has  net 
profit  or  income.  The  books  of  accounts  of  a  great  corporation 
contain  thousands  of  entries ;  the  proper  placing  of  each  one 
as  outgo  or  receipt  is  a  matter  of  nice  judgment  and  often  pre- 
sents problems  which  only  experts  are  supposed  to  be  competent 
to  solve.  Tax  laws  and  especially  the  tax  regulations  contain 
lengthy  and  intricate  rules  for  determining  income.  Income 
for  purposes  of  taxation  is,  as  we  shall  see,  more  or  less  ar- 
bitrarily defined  and  measured.  It  has  to  be  so  defined  for 
clearness  and  accuracy,  and  in  some  items  is  arbitrarily  de- 
fined to  reach  or  attain  some  ideal  of  uniformity  or  to  stand- 
ardise practice. 

For  purposes  of  taxation  we  deal  solely  with  private  income, 
whether  individual  or  corporate.  This  is  because  our  main 
purpose  is  to  make  comparisons  of  one  person  with  another 
as  to  ability  to  pay  taxes.  Society's  income,  national  income 
as  a  whole,  is  quite  a  different  concept.  The  net  increment  of 
community  wealth  is  quite  a  different  thing  from  the  sum  total 
of  all  individual  or  private  incomes.  For  taxation  purposes 
what  we  try  to  ascertain  is  my  income,  your  income,  and  every 
other  taxpayer's  income. 

Tentative  Definition.  —  We  may  tentatively  define  income  as 
receipts  during  a  given  period  of  time.  But  a  full  definition 
requires  a  definition  of  these  terms.  The  above  definition  is 
given  only  as  something  to  build  upon. 

Receipts. — Theoretically  the  receipts  may  be  in  goods,  in 
services,  in  enjoyments,  or  they  may  be  in  money.  Practically, 
and  especially  for  purposes  of  taxation,  goods,  services,  and  en- 
joyments per  se,  unless  they.are  of  a  kind  customarily  valued  in 


PERSON.\L  TAXES:    POLL  AND   INCOME  TAXES      225 

money,  are  not  considered  as  income.  Thus  the  goods  and 
services  that  the  housewife  creates  and  renders,  in  cooking  and 
housekeeping,  or  the  mother,  in  the  care  of  the  children,  are  not 
accounted  income,  despite  the  obvious  fact  that  they  add  to  the 
family  well-being  and  save  outgo.  But  the  enjoyments  and 
benefits  one  receives  from  living  in  one's  own  house  are  in  some 
countries  considered  income  at  a  valuation  equivalent  to  the 
rental  one  would  receive  if  he  leased  the  house  to  another.  One 
cannot  forecast,  but  it  seems  possible  that  if  it  should  become 
customary  to  pay  the  wife  and  mother  for  her  services  in  cook- 
ing, housekeeping,  and  nursing  these  items  might  sometime 
come  to  be  thought  of  as  income,  even  when  not  paid  for.  Total 
taxable  income  may  increase  without  any  increase  in  well- 
being.  Farm  produce  of  the  kind  ordinarily  sold  according 
to  the  custom  of  the  locality  is  often  considered  income  even 
when  not  so  sold,  but  used  or  consumed  by  the  farmer  and  his 
family.  Yet  fish  caught  by  the  farmer  in  the  brook  down  in 
the  meadow,  game,  flowers  from  the  farm  garden,  and  sleigh- 
rides  behind  the  farm  horses  in  winter  are  never  counted  as 
income.  The  money  test  is  quite  arbitrary  and  the  results 
are  ofttimes  very  whimsical.  The  story  of  the  impoverished 
villagers  who  got  rich  by  taking  in  each  other's  washing  is  very 
much  in  point.  Their  books  of  accounts  might  show  incomes, 
offset,  of  course,  by  equal  expenses.  But  the  expenses  being 
personal  spending  would  not  be  deductible  for  income  tax  pur- 
poses and  so  although  just  as  poor  as  before  the  villagers  might 
be  taxed  on  their  income.  To  avoid  income  tax  each  family 
in  the  village  of  the  story  would  have  to  do  its  own  not  its 
neighbour's  washing.  Yet  we  may  say  that  under  an  income 
tax  law  the  receipts  that  are  taxable  income  are  receipts  in  money 
or  in  moneys  worth. 

More  definite  and  distinctly  characteristic  is  the  fact  that 
in  stating  income  some  lapse  of  time,  as  a  day,  a  week,  a  year, 
must  he  named.  No  other  form  of  statement  is  possible.  "  Dur- 
ing a  period  of  time  "  is  absolutely  essential  to  the  idea  of  in- 
come. Ordinarily  the  period  of  time  used  is  a  year,  so  that 
unless  it  is  otherwise  specified  we  mean  annual  receipts  in  all 


226  INTRODUCTION  TO  PUBLIC  FINANCE 

that  follows.  The  importance  of  the  time  element  cannot  be 
overstated.^ 

Transfers  of  Capital  are  Not  Income.  —  Care  was  taken  in  the 
first  tentative  definition  not  to  say  all  receipts  during  a  given 
period  of  time.  That  was  done,  not  merely  to  exclude  the  kinds 
of  goods,  services,  and  enjoyments  not  ordinarily  valued  in 
money  but  also  to  exclude  from  an  individual's  income  transfers 
to  him  of  capital  or  property. 

Capital  and  Income  Distinguished.  —  In  business,  in  account- 
ing, and  by  economists  capital  is  ever  set  over  and  against  income 
and  income  distinguished  from  capital.  The  same  distinction 
rules  in  taxation.  The  chief  difference  between  a  property  tax 
and  an  income  tax  is  that  the  base  of  the  property  tax  is  capital 
value,  the  base  of  the  income  tax  is  income  value.  The  distinc- 
tion is  very  vital  to  an  understanding  of  the  income  tax. 

What  is  the  fundamental  concept  of  capital  has  been  the 
subject  of  voluminous  discussions.^  For  our  present  purpose 
we  are  fortunate  in  being  able  to  narrow  our  study  to  one  phase 
only  of  this  discussion.  That  phase  identifies  capital  with 
property.  With  capital  regarded  as  the  means  of  production, 
that  is,  as  consisting  of  all  these  things  interposed  between  the 
bare  hand  and  the  satisfaction  of  a  want,  we  are  not  directly 
concerned.  Nor  have  we  to  decide  whether  we  shall  include 
consumer's  goods  in  capital.  Taxation  falls  in  the  field  of  dis- 
tribution ;  that  is,  all  taxes  in  last  analysis  are  taken  from  the 
shares  of  the  product,  wages,  interest,  rent,  and,  if  you  are 
pleased  to  distinguish  a  fourth  category,  profits.  Again,  it  is 
important  to  note  that  we  are  concerned  only  with  the  value 
of  capital,  a  concept  determined  in  the  field  of  exchange.  There 
is  a  difference  between  land  and  property  rights  to  land.  Im- 
proved land  may  be  productive  capital,  its  ownership  is  private 
capital  or  property,  its  vahie  is  taxable  capital  or  property  value. 

1  Failure  to  specify  any  time  element  in  the  legal  definition  of  income  in  the  tax 
law  of  the  United  States,  which  law  says  simply  "income,"  is  a  logical  weakness  that 
has  led  to  serious  controversy.  It  has  become  apparent  that  it  is  not  sufficient  to 
leave  the  essential  element  —  time  — unspecified,  see  below. 

2  The  whole  subject  is  interestingly  discussed  by  Professor  Irving  Fisher  in  The 
Nature  of  Capital  and  Income. 


PERSONAL   TAXES:  POLL  AND  INCOME  TAXES        227 

We  are  not,  in  taxation,  so  much  concerned  with  how  the  loaf 
came  to  be,  whence  came  the  flour  or  how  the  baking  was  done, 
but  far  more  with  who  get  the  slices  when  it  is  cut.  We  as- 
sume that  a  man's  ability  to  pay  is  based  upon  the  value  of  his 
property  and  the  amount  of  his  earnings  and  both  are  of  course 
measured  by  exchange  value.  In  taxation  we  deal  only  with 
values  or  measured  wealth,  and  solely  with  private  wealth. 
When  we  consider  the  taxation  of  a  railway  we  are  not  looking 
upon  it  as  a  great  complicated  tool,  or  complex  of  machinery, 
but  as  property.  We  inquire  who  owns  it  and  what  ability  to 
pay  taxes  that  ownership  represents,  not  how  it  carries  goods  or 
enhances  social  well-being. 

In  taxation,  moreover,  we  are  dealing  with  persons  and  their 
property  or  their  income.  The  more  personal  a  tax  is  the  more 
the  emphasis  falls  on  the  ownership  and  value  of  wealth,  that 
is,  on  income  or  property  and  its  value.  The  ownership  of  a 
piece  of  fertile  land  which  yields  an  income  and  makes  a  man 
"  rich"  is  the  index  of  ability  to  pay  taxes.  What  causes  the 
fertility  or  how  that  fertility  is  brought  to  fruition  by  labour 
are  important  questions,  but  beyond  the  immediate  issue. 

For  present  purposes  it  seems  best  to  regard  capital  or  property 
value  as  derived  from  income.  Capital  may  be  the  source  of  in- 
come, hut  its  ownership  is  significant  only  as  the  right  to  receive 
income  and  its  value  is  fixed  by  the  income. 

An  assured  income,  not  dependent  solely  on  the  labour  of  its 
recipient  (which,  of  course,  is  not  absolutely  "  assured  "), 
usually  has  a  property  or  capital  value.  Conversely,  with  cer- 
tain partial  exceptions  or  modifications,  all  property  values  are 
the  capitalized  values  of  assured  series  of  annual  receipts.  The 
series  may  be  long  or  it  may  be  short,  regular  or  irregular.  This 
condensed  statement  is  of  the  first  importance  and  requires 
careful  study  and  some  amplification. 

Income  is  a  Series  of  Receipts.  —  Professor  Fisher  has  pic- 
turesquely described  income  "  as  a  flow  through  a  period  of 
time  and  not,  like  capital,  as  a  fund  at  an  instant  of  lime." 
The  metaphor  is  excellent  for  bringing  out  the  contrast.  But 
unfortunately   we   cannot   mentally   handle,   nor   in   language 


228  INTRODUCTION  TO  PUBLIC   FINANCE 

other  than  figurative  describe,  a  flow  without  stopping  it  or 
dividing  it  into  a  series,  as  it  were,  of  drops.  Pay  day  comes 
but  once  a  week,  or  month.  Wages  do  not  flow,  they  come  in 
drops.  The  only  way  in  which  we  can  become  conscious  of  the 
passage  of  time  is  to  note  the  sunrise  and  sunset,  or  to  count 
the  ticks  of  the  clock,  or  by  reference  to  some  other  series  of 
events.  Obviously  this  mentally  divides  or  stops  the  flow. 
Sometimes  income  is  likened  to  the  flow  of  a  stream  of  water. 
When,  however,  we  wish  to  measure  the  flow  of  a  stream  we 
have  to  stop  it,  or  to  divide  the  stream  mentally  if  not  physically 
into  measurable  parts.  Thus  the  miner  or  the  irrigationist 
measures  water  by  the  miner's  inch,  a  cubic  quantity  accumu- 
lated at  the  end  of  a  space  of  time.  So  too  the  actuary,  who 
in  problems  of  insurance  is  busied  in  computing  the  amount  of 
capital  corresponding  to  a  given  income,  or  the  income  corre- 
sponding to  a  given  amount  of  capital,  never  deals  with  a  con- 
tinuous flow,  but  always  with  a  series  of  incoming  or  outgoing 
payments  each  at  a  given  point  of  time.  If  we  know  the  amount 
and  date  of  each  of  a  series  of  receipts,  we  can  compute  the 
present  or  capital  value  thereof ;  and  conversely  if  we  know  the 
present  or  capital  value,  we  can  compute  the  series  of  receipts 
which  justifies  it.  This  we  can  do  whether  the  series  is  regular 
or  irregular,  immediate  or  future,  long  or  short.  Capital  and 
income  are  then  two  connected  ideas.  There  can  be  no  such 
thing  as  capital  without  income,  present  or  future,  in  goods  or 
services  if  not  in  money.  In  this  case  the  two  terms  describe 
each  a  difi'erent  side  of  the  same  shield.  But  curiously  enough 
there  can  be  income  without  capital.  The  wages  of  labour  are 
income  but  have  no  capital  value. 

Receipts  in  Uses  and  in  Money.  —  We  have  to  recognise  dif- 
ferent kinds  of  capital  or  property  whose  value  arises  from  dif- 
ferent kinds  of  receipts,  (i)  Some  kinds  of  property,  like  tools, 
furniture,  books,  pictures,  clothing,  and  utensils  yield  from  time 
to  time,  when  used  directly  by  their  owners,  a  series  of  satis- 
factions or  advantages  which  we  may  caU  revenue  or  income  by 
use.  Property  of  this  kind  has  a  selling  or  present  value  be- 
cause of  the  uses  to  which  it  may  be  put,  the  series  of  satisfac- 


PERSONM.  TAXES:    POLL  AND   INCOME  TAXES       229 

tions  or  helps  which  it  affords.     The  owner  may,  however,  lend 
the  property  to  others  for  a  series  of  receipts  in  money.     This 
carries  the  property  into  class  (2)  below.     The  money  then  meas- 
ures, roughly  it  may  be,  the  value  of  the  uses  or  enjoyments 
afforded.     The  measurement  is  often  rough,  because  deprecia- 
tion, replacement  cost,  sentimental  considerations,  or  the  inertia 
of  the  owner  and  the  imperfections  of  the  loan  market  for  such 
things  as  these  prevent  arrival  at  a  sure  and  certain  value.     The 
main  point  just  here  is  that  such  property  has  a  value  dependent 
on  use  whether  rented  or  not.     (2)  Other  kinds  of  property, 
including  rights  in  or  to  the  property  of  others,  when  lasting  or 
durable  in  character,  yielding  definite  returns  according  to  use 
or  by  contract,  like  land,  or  real  estate  generally,  mortgages, 
bonds,  and  sometimes  stocks,  have  a  present  or  capital  value 
which  can  be  definitely  ascertained  from  the  yield  or  receipts 
owned.     The  connection  here  between  the  capital  and  the  in- 
come is  so  definite  in  many  cases  that  the  one  can  be  accurately 
computed  from  the  other,  and  contracts  based  on  the  computa- 
tion can  be  made  and  enforced.     UnHke  the  first  case  we  have 
here  a  case  in  which  the  money  equivalents  of  capital  to  in- 
come and  income  to  capital  are  sometimes  very  definite.     There 
is  nothing  more  definite  and  certain  in  the  whole  field  of  economic 
measurements  than  the  relation  between  the  value  of  a  govern- 
ment bond  and  the  interest  it  pays.     The  value  depends  on  the 
interest. 

There  is  a  third  class  of  receipts  to  which  we  shall  come  in 
the  discussion  below,  which  have  no  corresponding  capital 
value  and  which  are  always  and  strictly  income,  and  nothing 
but  income. 

Use  Receipts  Not  Taxable.  —  Receipts  through  use  or  satis- 
faction from  use,  not  by  lending  and  not  commonly  measured 
in  money,  connected  with  property  of  the  sort  discussed  under 
(i)  above  are  not  considered  income  for  income  tax  purposes, 
except  rarely  when  the  property  in  question  is  of  such  a  char- 
acter that  the  use  values  can  by  analogy  to  rental  or  money 
values  be  readily  determined.  But  income  in  money  received 
by  the  owner  of  such  property,  as  for  example  when  it  is  rented, 


230  INTRODUCTION  TO  PUBLIC   FINANCE 

is  always  included.  This  distinction  corresponds  to  the  common 
concept  of  income.  Thus,  no  income  tax  law  requires  the 
owner  of  a  fine  painting  to  list  as  part  of  his  taxable  income 
the  satisfaction  he  gets  from  looking  at  it  or  from  proudly 
displaying  it  to  admiring  friends.  There  is  no  practical  way 
of  measuring  such  satisfaction.  But  every  income  tax  law 
does  require  the  furniture  dealer  who  rents  out  furniture, 
pianos,  or  paintings,  to  pay  a  tax  on  the  money  income  he 
receives.  It  should  be  observed,  however,  that  property  whose 
value  depends  on  use  income  solely  may  be  taxed  as  property, 
despite  the  fact  that  only  with  great  difiiculty  can  it  be  taxed 
through  its  income.  Thus  my  arm-chair  by  the  fireplace  may 
be  taxed  as  property,  but  I  cannot  well  be  expected  to  list  as 
income  the  joy  of  sitting  in  it. 

Income  connected  with  property  of  the  sort  described  under 
(2)  above  is  almost  always  taxable  income  under  an  income  tax. 
Sometimes  there  is  a  difficulty  in  deciding  whether  the  re- 
ceipts and  the  property  should  be  classed  under  (i)  or  under 
(2).  Thus  when  an  owner  occupies  and  uses  his  own  home, 
the  income  in  use  may  be  taxable  at  a  value  per  annum  deter- 
mined by  analogy  to  homes  that  are'  rented.  In  countries 
where  the  home  is  generally  rented  the  exceptional  owner  who 
occupies  his  own  home  would  consider  its  rental  value  as  a 
part  of  his  income  and  it  would  be  natural  for  the  income  tax 
law  to  do  the  same.  But  in  other  countries  where  the  reverse 
is  the  case  it  is  more  natural  to  class  the  home  as  use  property, 
not  as  income  property,  then  it  is  taxed  as  property,  not  as 
income. 

Capital  and  Income  are  Intimately  Related.  —  It  is  important 
to  bear  in  mind  that  property  value,  or  capital,  and  income 
value  are,  so  far  as  the  cases  under  (2)  are  concerned,  two  inti- 
mately related  things.  While  the  writer  holds  the  view  ex- 
plained above  that  the  income  value  is  the  cause  or  source  of 
the  capital  value,  it  is  not  necessary  to  establish  that  point. 
The  two  may  be  regarded  as  simply  two  different  ways  of  look- 
ing at  the  same  thing,  or  as  suggested,  two  sides  as  it  were  of 
the  shield.     Thus  we  may  say,  as  is  the  custom  in  America, 


PERSON.\L  TAXES:    POLL  AND  INCOME  TAXES     23 1 

that  a  given  building  is  worth  $100,000,  meaning  that  it  should 
sell  for  that ;  or  we  may  say,  as  is  quite  common  in  England, 
that  the  same  building  is  worth  $5000  (or  £1000)  per  annum. 
The  two  statements  describe  the  same  facts.  The  British 
property  and  income  tax  law  specilles  the  "  annual  value  " 
of  land  as  taxable ;  the  British  increment  value  duty  falls  on 
the  capital  value  of  land. 

The  prevailing  market  rate  of  interest,  with  due  allowance 
for  risk,  depreciation,  and  other  factors,  is  commonly  used  in 
measuring  the  relation  between  capital  values  and  income 
values,  under  (2).  Thus  the  bonds  of  a  strong  and  solvent 
government  in  times  of  peace  may  sell  on  "  a  three  per  cent 
basis."  Thirty  dollars  a  year  in  perpetuity  is  thereby  estab- 
lished as  the  equivalent  of  $1000  payable  now. 

Capital  so  considered  is  not  necessarily  regarded  as  a  stock. 
It  is  a  fund  in  the  sense  that  it  is  the  present  value  of  an  income, 
or  an  expected  series  of  future  receipts.  That  my  capital  may 
at  any  given  moment  contain,  in  addition  to  those  kinds  of 
property,  which  are  the  right  to  receive  incomes,  some  cash  or 
liquid  items,  not  tied  to  income,  does  not  require  a  different 
analysis ;  for  the  value  of  a  cash  item  depends  on  the  prospect 
of  investment,  that  is,  of  the  purchase  of  income,  which  it  holds 
in  itself.  Capital  so  considered  is  not  like  the  waters  of  a 
stream  accumulated  in  a  reservoir  into  which  it  flows.  It  is 
rather  a  comprehensive  aspect  of  the  stream  itself. 

Future  Income  Has  a  Present  Capital  Value.  —  This  brings 
us  to  the  last  point  that  we  need  to  consider  in  connection 
with  capital  of  class  (2).  That  is,  that  the  income,  or  a  series 
of  payments,  is  not  necessarily  derivable  in  the  immediate 
future.  It  is  the  expected  future  income  no  matter  how  re- 
mote that  gives  value  to  a  vacant,  unused  lot  of  land.  The 
income  may  not  begin  for  twenty  years  or  more,  but  unless  it 
is  expected  to  begin  sometime  and  to  continue  for  a  while  it 
would  be  folly  to  buy  the  land.  Since  the  income  tax  can 
deal  only  with  the  income  measurable,  that  is,  income  already 
received,  such  a  tax  is  not  applicable  when  the  income  is  remote 
and  therefore  somewhat  uncertain.     The  only  available  basis 


232  INTRODUCTION  TO   PUBLIC   FINANCE 

of  taxation  in  such  a  case  is  the  property  value.  It  is  doubt- 
less because,  in  the  United  States,  there  is  so  much  property 
having  a  present  value  dependent  on  incomes  expected  to  arise 
only  after  many  years,  so  much  property  without  present 
income,  that  the  property  tax  is,  in  this  country,  so  strongly 
entrenched. 

It  should  now  be  clear  that  so  far  as  property  and  income  of 
group  (2)  is  concerned  the  tax  may  be  placed  either  (a)  on  the 
property  value  or  (b)  on  the  income,  if  the  property  be  now 
income  bearing,  and  that  substantially  the  same  effect  may  be 
reached  by  one  method  as  by  the  other.  A  new  permanent 
tax  on  income  will  diminish  the  corresponding  property  value, 
and  a  new  permanent  tax  on  the  property,  by  diminishing  the 
income,  will  likewise  diminish  the  property  value.  Without 
going  into  refinements  it  may  be  said  that  if  interest  stands 
at  5  per  cent  a  tax  on  property  at  i  per  cent  is  roughly  the 
equivalent  of  a  tax  on  income  at  20  per  cent.  But  this  of 
course  applies  only  in  class  (2).^ 

Incomes  Which  Have  No  Corresponding  Property  Value.  — 
So  far  we  have  considered  only  two  kinds  of  receipts,  one  in 
uses,  satisfactions,  or  enjoyments  which  are  not  taxable  in- 
come, the  other  owned  or  contractual  and  classed  as  income. 
But  there  are  other  receipts  which  are  always  counted  as  income 
and  which,  in  a  sense,  are  the  simplest  and  most  common  kinds 
of  income.  These  are  the  earnings  of  personal  exertion,  such 
as  wages,  salaries,  fees,  and  the  profits  of  trading.  The  striking 
thing  about  these  is  that  there  is  no  way  to  tax  them  directly 
save  as  income.  There  is  no  corresponding  capital  or  property 
value.  It  is  not  necessary  to  discuss  the  refinements  some- 
times entered  into  as  to  whether  this  sort  of  income  may  be 
considered  as  related  to  human  capital  of  brain  or  of  brawn, 
that  is,  to  accumulated  knowledge,  developed  skill,  or  strength 
and  acquired  cunning.  The  simple  fact  is  that  where  personal 
liberty  prevails  we  never  in  the  business  world  capitalise  a 
wage  or  a  salary  nor  the  earnings  of  vocations  of  any  sort. 

1  Further  consideration  of  this  interesting  point  will  be  found  under  Incidence, 
Chapter  X. 


PERSONAL   T.\XES:    POLL   AND  INCOME  TAXES         233 

The  Two  Kinds  of  Income :  Funded  and  Unfunded.  —  From 
the  point  of  view  of  taxation,  then,  there  are  two  main  kinds  of 
income,  (i)  income  to  which  there  is  a  corresponding  capital 
value,  and  (2)  income  from  exertion.  These  are  properly 
distinguished  as  funded  and  unfunded,  but  are  more  often 
sentimentally  called  earned  and  unearned  incomes.  Almost 
instinctively  the  legislator  recognises  a  difference  between 
these  two  and  accords  to  each  a  different  treatment.  Usually 
earned  incomes  are  treated  more  tenderly  than  are  the  un- 
earned and  are  taxed  more  lightly.  It  has  just  been  said  that 
this  distinction  is  accorded  almost  instinctively.  It  is  rare 
that  one  hears  any  discussion  in  legislative  halls  of  the  reasons 
for  making  the  distinction.  It  seems  to  be  assumed  without 
argument  that  it  should  be  so.  Thus  Gladstone  called  funded 
or  unearned  incomes  "  lazy  incomes  "  and  by  that  phrase  car- 
ried through  Parliament  a  measure  imposing  heavier  taxes  on 
them  than  on  earned  incomes.  Yet  when  it  is  remembered 
that  the  funded  income  may  be  the  result  of  years  of  toil  and 
privation  spent  to  accumulate  something  to  live  on  in  old  age, 
the  reflection  cast  by  the  term  "  lazy  incomes  "  seems  ill- 
deserved  in  some  cases.  Many  funded  incomes  may  have 
been  earned  by  hard  and  deserving  labour. 

While  income  earned  by  the  sweat  of  one's  brow  does  seem  a 
thing  more  dear  than  income  which  comes  in  periodically  with- 
out present  effort,  there  are  better  reasons  than  this  sentimental 
one  for  a  different  treatment  of  the  two  for  taxation  purposes. 
One  reason  is  that  by  tradition,  and  perhaps  in  its  very  nature, 
the  state  is  a  partner  in  the  ownership  of  all  property.  It  has 
been  called  a  silent  partner,  but  the  state's  existence  is  so 
essential  to  the  existence  of  property  and  to  its  security,  that 
the  partnership  is  very  real.  The  right  of  property  and  the 
validity  of  contracts  are  subject  to  such  restrictions,  benefi- 
cial to  the  owners  in  the  aggregate,  as  the  state  may  in  its 
wisdom  impose.  Taxation  of  property,  or  of  income  that  has 
a  capital  or  property  value,  is  one  way  the  state  has  of  assert- 
ing its  community  or  property-partnership  interest.  Another 
reason  is  that  out  of  earned  income  should  come  savings.     The 


234  INTRODUCTION  TO  PUBLIC   FINANCE 

number  of  persons  who  have  earnings  but  have  little  property 
is  very  great.  Social  welfare,  from  many  considerations,  re- 
quires that  these  persons  should  save.  One  such  consideration 
is  that  he  who  has  little  or  no  income  other  than  from  his  earn- 
ings is  in  duty  bound  to  provide,  by  savings,  a  fund  for  the  future 
both  of  himself  and  of  his  dependents.  His  income  is  there- 
fore far  less  free  income  than  is  that  of  the  man  of  property, 
however  small  the  property  may  be,  who  has  met  that  obli- 
gation. But  these  reasons,  while  justifying  lower  rates  on 
earned  than  on  unearned  incomes,  do  not  by  any  means  justify 
the  entire  exemption  of  earned  incomes,  nor  do  they  justify 
hostile  and  confiscatory  taxes  on  unearned  incomes. 

The  difference  in  treatment  of  the  two  kinds  of  income  is 
sometimes  worked  out  in  the  income  tax  itself  and  sometimes 
is  brought  about  by  the  addition  of  other  taxes  on  the  capital 
value  of  unearned  income.  In  the  United  States  the  state  and 
local  taxes  on  property  impose  a  heavy  burden  on  the  capital 
value  of  unearned  incomes  and  have  the  effect  when  con- 
joined with  the  income  taxes  of  imposing  a  heavier  burden  on 
the  unearned  incomes. 

Taxation  of  Income  Not  Simple.  —  There  seems  to  be  a  de- 
cided inclination  for  theorists  to  regard  the  income  tax  as  a 
particularly  ideal  tax.  Some  socialists  have  proposed  a  single 
income  tax  as  the  acme  of  perfection.  It  does,  indeed,  seem 
to  be  capable  of  being  made  to  conform  very  fully  to  all  require- 
ments of  the  faculty  or  ability  theory.  But  in  practice  there 
are  quite  as  many  difficulties  in  the  equitable  working  out  of 
the  income  tax  as  are  to  be  found  in  other  taxes.  We  have 
not  by  any  means  completely  solved  the  problem  of  just  taxa- 
tion by  placing  an  income  tax  law  on  the  statute  books.  There 
are  difficulties  of  legislation  and  difficulties  of  administration 
to  be  met. 

The  difficulties  of  definition  of  income  are  so  great  that  legis- 
lators often  decUne,  or  fail,  to  attempt  it.  The  result  is  that 
the  statutes  sometimes  say,  in  effect,  "  income  is  income." 
Thus  the  United  States  income  tax  law  says  that  "  gross  in- 
come "  includes  "  gains,  profits,  and  income.^'     The  British  in- 


PERSONAL  TAXES:    POLL  AND   INCOME  TAXES        235 

come  tax  law  is  better  in  verbal  form  in  that  it  says  that 
taxable  income  is  either  "  the  annual  value  "  of  property,  or  the 
"  annual  amount  of  profits,"  yet  it  is  equally  unexplanatory. 
It  defines  by  synonym.  The  matter  is  thus  left  largely  to  ad- 
ministrative determination.^ 

Is  an  Increment  in  Property  Value  Income  ?  —  Aside  from 
difficulties  in  phraseology  we  encounter  at  the  very  start  in- 
herent difficulties.  One  of  these  is  very  important  and  may  be 
used  as  an  illustration.  Is  an  increment  in  property  value 
income?  Let  us  take  the  case  of  a  man  who  owns  an  ofiice 
building  site  with  an  adequate  building  on  it.  It  may  be  that 
as  time  goes  on  the  demand  for  offices  in  his  building  increases 
and  the  rents  go  up.  The  rentals  are,  of  course,  income.  But 
in  consequence  of  the  increase  in  rentals  the  property  value 
increases.  The  lot  and  building  will  sell  for  more.  Is  the 
increment  in  value  income?  Probably  many  people  with  the 
specific  illustration  before  them  would  say  no.  The  rentals 
are  income  and  so  is  their  increase,  but  the  increment  is  not, 
they  would  say.  A  bookkeeper  would  not  ordinarily  include 
the  increment  in  his  annual  income  account,  although  he  might 
from  time  to  time  "  write  up  "  the  value  of  the  proprietorship 
to  cover  the  increment.  If  the  property  were  sold  the  incre- 
ment would  be  put  down  as  a  profit  but  still  with  careful  dis- 
tinction from  annual  income.  The  essential  feature  of  income, 
namely  receipts  during  a  period  of  time,  is  lacking  when  we  are 
confronted  with  a  single  profit  on  some  one  occasion.  Another 
reason  for  this  common  attitude  is  apparently  a  more  or  less 
well-founded  opinion  that  while  the  owner  of  such  a  building 
may  properly  spend  the  annual  receipts  he  ought  not  to  spend 
the  increase  in  the  value  of  his  property.  For  in  so  doing, 
although  his  original  investment  value  might  remain  the  same, 
he  is  in  a  sense  "  impairing  his  capital."     Possibly  the  practical 

•  It  is  rumarkahlc,  however,  how  vital  the  phraseology  of  a  definition  becomes. 
The  inclusion  of  the  word  "annual"  in  the  British  definition  and  its  omission  in  the 
American  make  a  vast  difference  in  the  frame  of  mind.  The  question  of  the  tax- 
ability of  "stock  dividends"  and  other  items  of  increment  in  capital  value  which 
vexes  Congress  and  the  Courts  might  not  have  arisen  had  the  constitution  said 
"annual  income"  instead  of  just  "income."  In  Great  Hritain  theris  is  no  such 
controversy. 


236  INTRODUCTION  TO  PUBLIC  FINANCE 

consideration  that  he  would  have  to  sell  the  property  before 
he  could  lay  hands  on  the  increment  to  spend  it  has  something 
to  do  with  this  view.  There  seems  to  be  in  the  popular  mind  a 
clear  idea  that  income  is  something  spendable  without  impair- 
ing one's  future,  even  when  that  future  is  growing  brighter  every 
year.  Spending  is  associated  with  the  satisfaction  of  our 
wants.  Our  wants  are  regularly  recurrent.  That  is,  we  grow 
hungry  once  in  so  often  and  with  striking  regularity.  From 
the  connection  between  income  and  spending  comes  the  thought 
that  income  is  something  regular  and  recurrent  at  definite 
times.  The  more  certain  and  regular  an  income  is  the  more 
desirable  it  is.  Increments  in  property  values  do  not  appear 
to  be  either  regular,  recurrent,  or  certain.  Yet  the  whole 
notion  is  vague  and  depends  upon  what  one  ought  to  do  if  he 
be  wise.     Hence  there  is  a  real  difficulty. 

It  is  possible  that  increments  in  property  values  would  not 
have  given  the  lawmaker  or  the  administrator  much  trouble 
if  they  were  all  of  the  character  of  the  one  in  the  illustration. 
The  government  might  very  well  be  content  with  the  growing 
taxes  on  the  growing  rentals  and  let  the  increment  go ;  or  if 
such  increments  be  regarded  as  special  evidence  of  ability  to 
pay  the  government  might  impose  on  them  another  and  a 
different  sort  of  tax.  But  all  cases  are  not  so  clear.  Dealers 
in  land  and  buildings  make  an  income  not  only  by  bringing 
buyers  and  sellers  together,  but  sometimes  by  buying  and 
holding  real  estate  for  the  increment.  A  part  of  their  profits 
comes  from  the  increment  accruing  while  they  hold  the  prop- 
erty. When  this  is  incidental  to  their  regular  business  they 
always  consider  the  entire  profits  as  income.  There  may  be  a 
similar  increment  in  the  value  of  the  dry  goods  a  merchant 
buys  and  sells.  The  gains  of  a  regular  trader  in  grain  from  a 
rise  in  prices  even  though  they  are  irregular  in  time  and  in 
amount,  are  nevertheless  income.  The  same  principle  is  in- 
volved in  the  question  of  the  taxability  or  non-taxability  of 
"  stock  dividends  "  when  they  are  made  for  the  purpose  of 
adjusting  the  par  value  of  the  capital  stock  of  a  corporation  to 
the  actual  value  of  the  corporation  as  a  going  concern,  to  the 


PERSONAL   TAXES:    POLL  AND  INCOME  TAXES     237 

value,  that  is,  based  on  the  earnings.  Such  stock  dividends  are 
distributions  of  capital  increment.  Stock  dividends  made  to 
cover  an  investment  of  earnings  in  the  business  are  somewhat 
diflferent.  The  difficulty  arises  because  there  is  a  difference  in 
degree  as  well  as  in  kind. 

Decrease  in  Property  Values.  —  The  question  is  all  the  more 
troublesome  from  the  fact  that  the  converse,  a  decrease  in 
property  value,  is  often  treated  the  other  way.  That  is,  such  a 
decrease  is  often  treated  as  a  loss  deductible  from  income. 
Taxpayers  are  very  insistent  that  depreciation  and  obsolescence 
shall  be  treated  as  losses.  That  places  decreases  in  property 
values  on  the  income  side,  not  on  the  capital  side  of  accounts. 
But  one  can  differentiate  such  losses  from  negative  increments. 
To  keep  productive  agents  in  condition  and  to  maintain  the 
income  is  a  cost.  A  triie  negative  increment,  such  as  the  de- 
crease in  land  value  where  population  moves  away,  cannot  be 
restored  or  made  good,  at  that  spot,  and  is  not  a  cost,  although 
it  may  be  socially  wise  to  allow  for  it  so  that  other  land  may  be 
developed. 

How  Tax  Laws  Treat  Increment  Values.  —  The  tax  laws 
generally  treat  this  puzzle  as  a  Gordian  knot,  to  be  cut,  not  to 
be  untied.  They  cut  it  in  one  of  two  ways.  They  either  dis- 
regard the  increment  altogether  when  it  comes  unaccompanied 
by  active  dealing,  as  in  our  first  illustration ;  or  they  tax  it  in 
every  form  when  realised.  That  is  when  the  increment  is  re- 
duced to  a  clear  money  valuation  on  the  occasion  of  a  sale  or 
other  transfer,  as  by  inheritance,  resulting  in  an  appraisal  of 
the  property.  Inasmuch  as  legislators,  tax  administrators,  and 
the  courts  have  not  yet  solved  the  problem,  we  may  perhaps 
be  excused  from  attempting  a  rigid  solution.  The  logic  of  our 
position  (stated  above)  as  to  the  relation  of  income  to  capital 
would  incline  us  to  the  view  that  since  the  increment  is  due  to 
the  increase  in  present  or  future  income,  it  is  not  itself  income. 
A  thing  that  is  the  effect  of  a  cause  cannot  at  the  same  time  be 
of  the  cause. 

Annuities.  —  Difficulty  is  encountered  in  the  case  of  annuities 
and  pensions  payable  for  a  fixed  term  of  years  or,  it  may  be, 


238  INTRODUCTION  TO   PUBLIC   FINANCE 

for  life.     Annuities  are  bought  in  order  to  have  a  regular  income 
to  spend  and  pensions  are  for  the  pensioner  to  live  on  usually 
in  old  age.     Hence  to  most  people  they  look  remarkably  like 
income  and  income  of  an  exceptionally  desirable  sort.     But 
annuities  are  computed  by  actuaries  with  keen  minds  who  are 
skilled  in  argument  and  they  have  not  failed  to  call  the  attention 
of  lawmakers  and  tax  administrators  to  the  mode  of  compu- 
tation of  annuities.     They  maintain  that  each  annual  payment 
in  an  annuity  of  a  flat  or  fixed  sum  each  year  is  composed  of 
two  parts,  one  of  which  is  by  nature  interest  and  hence  unde- 
niably income,  and  the  other  a  repayment  of  or  using  up  of 
capital.     Even  a  pension  paid  on  retirement  after  long  service 
is  properly  regarded  as  the  result  of  the  accumulation  of  with- 
held wages  into  a  capital  sum  which  put  at  interest  is  paid 
back,  interest  and  capital  together,  in  each  instalment  during 
the  inactive  or  retirement  period  and  up  to  death.     Income 
tax  lawmakers  sometimes  yield  to  the  argument  and  allow  a 
deduction  for  part  of  the  annuity  as  a  capital  transfer,  or  as  in 
the  case  of  the  Massachusetts  law,  compromise  and  impose  a 
lower  tax  rate  on  annuities  than  on  other  incomes.     Sometimes, 
however,  so-called  annuities  are  perpetual,  in  which  case  they 
are  generally  the  income  of  a  life  estate  in  some  property,  which 
life  estate  passes  to  the  next  heir,  and  as  such  they  are  pure 
income.     The  British  law  with  some  exceptions  taxes  purchased 
terminable  annuities  in  full  as  income.     In  his  work  on  British 
Property  and  Income,  Stamp  reports  (p.  190)  that  the  amounts 
are  not  large.     But  the  main  difficulty  is  that  a  purchased  life 
annuity  is  computed  on  the  theory  of  "  the  expectation  of  life," 
a  theory  true  of  a  large  group  of  men,  but  not  necessarily  indi- 
vidually true  even  for  any  one  man  in  the  group,  while  the  in- 
come tax  must  apply  to  each  man  by  himself.     Thus  if  the  law 
allows  a  deduction  for  principal  used  up  after  the  manner  cal- 
culated in  actuaries'  tables,  one-half   the  annuitants  will  get 
too  much,  the  other  half  too  little,  allowance.     The  difficulty  is 
practically  beyond  solution,  because  one  man's  life  cannot  be 
assumed  to  be  sure  to  equal  the  average  life  of  many.     Since, 
however,  life  annuitants  and  pensioners  are  usually  old  or  dis- 


PERSONAL   TAXES:    POLL  AND   INCOME  TAXES       239 

abled,  we  might  consider  that  as  an  additional  and  sufl5cient 
reason  for  a  lower  rate  on  the  entire  annuity  or  pension  and  thus 
achieve  average  equity  as  well  as  the  halo  of  mercy.  Since 
pensions  are  growing  in  favour  as  a  means  of  providing  for  dis- 
ability and  old  age  and  are  likely  to  become  very  common,  the 
proper  solution  of  the  problem  is  pressing. 

If  annuities  are  taxable  in  their  entirety  as  income,  there 
would  be  little  gained  in  buying  one  for  a  definite  term,  as  ten 
or  twenty  years,  for  a  man  would  save  money  by  investing  his 
capital  and  spending  the  interest  plus  a  part  of  his  principal 
each  year.  But  the  case  would  be  different  with  a  life  annuity, 
as  he  could  not  forecast  how  long  he  might  hve.^ 

Mining  Dividends  Like  Annuities.  — The  analogous  case  of  a 
mine  often  receives  a  different  consideration  and  treatment. 
Many  people  buy  mining  stock  and  spend  the  entire  dividends 
as  income,  regardless  of  the  fact  that  the  ore  bodies  are  ex- 
haustible and  when  the  ore  deposits  are  gone  the  original  capital 
or  investment  is  gone.  No  income  tax  law  would  allow  an 
individual  stockholder  to  set  aside  out  of  his  dividends,  as  non- 
taxable, the  amount  necessary  in  the  end  to  restore  his  capital 
or  original  investment.  Yet,  when  this  very  thing  is  done  by 
the  company,  in  the  guise  of  a  depletion  fund,  so  that  the  divi- 
dends are  in  fact  less  each  year  in  consideration  of  the  ultimate 
repayment  of  the  investment  as  capital,  the  income  tax  law  is 
complacent. 

'  The  theory  of  the  federal  income  tax  in  the  United  States  as  applied 
to  purchased  annuities  requires  the  deduction  of  the  principal  or  premiums 
and  the  return  for  taxation  of  the  interest  portions  of  an  annuity  only.  The 
regulations  (Articles  47  and  72,  Regulation  45,  Act  of  1918)  to  date  are 
couched  in  language  difficult  of  interpretation.  The  annuitant  is  told  that  he 
may  consider  as  "  proceeds  of  insurance  "  and  hence  as  no  part  of  his  gross 
income,  "  during  his  life  only  so  much  of  the  amount  received  by  an  insurer 
under  life,  endowment  or  annuity  contracts  as  represents  a  return,  without 
interest,  of  premiums"  (Art.  72).  In  another  place  "where  an  insurer  receives 
under  life  insurance,  endowment  or  ;innuily  contracts  sums  in  excess  of  the  pre- 
miums paid  therefor,  such  excess  is  income  for  the  year  of  its  receipt"  (Art.  47). 
Since  the  actuarially  computed  part  of  the  annuity  wliich  is  capital  would  seldom 
or  never  correspond  to  the  actual  in  a  life  annuity  or  pension  the  general  principle 
that  a  receipt  is  not  a  receipt  until  rcfluccd  to  possession  would  lead  us  to  infer  that 
the  regulation  means  that  the  annuitant  pays  no  tax  until  the  annual  jiayments 
received  sum  up  to  the  amount  paid  in  [iremiums.  We  are  informed  that  this  is 
the  practice.  Hence  most  annuitants  will  not  be  taxed  for  many  years,  and  some 
who  die  early  never. 


240  INTRODUCTION  TO  PUBLIC  FINANCE 

Allowable  Expenses.  —  Not  all  the  difficulties  in  regard  to 
income  turn  on  the  distinction  between  capital  and  income. 
There  are  difficulties  as  to  what  are  properly  allowable  expenses. 
There  are  great  difficulties  in  the  measurement  of  the  value  or 
amount  of  the  income,  especially  in  estimating  incomes  not 
wholly  in  money.  There  are  times  when  valuation  enters  here 
almost  as  importantly  as  it  does  in  the  assessment  of  property. 

Types  of  Income  Taxes.  —  Income  taxes  are  not  all  alike. 
The  differences  are  often  more  than  superficial.  Thus  the 
British  tax  includes  the  annual  value  of  certain  kinds  of  prop- 
erty, whether  realised  in  money  or  not,  that  is,  it  includes  value 
in  use,  and  excludes  from  income  a  great  part  of  the  increment 
in  property  values  even  when  realised  in  money.  Per  contra 
the  American  tax  is  almost  strictly  a  tax  on  "  realised  money 
income."  Unlike  the  British,  it  excludes  nearly  all  value  in 
use  and  includes  capital  increment  value  when  realised.  There 
is  great  significance  in  the  title  of  the  British  tax,  which  is  a 
tax  on  property  and  income.  A  tax,  that  is,  on  the  annual 
value  of  property  and  on  the  annual  amount  of  profits.  The 
British  tax  makes  a  sharp  distinction  between  different  kinds 
of  income  —  the  American  does  not.  One  result  of  this  is  that 
the  British  tax  is,  as  to  some  of  its  important  schedules,  dis- 
tinctly an  assessed  tax.  One  of  the  most  surprising  things 
about  the  American  tax  is  that  there  is  no  regular  official  assess- 
ment at  all.  This  feature  will  be  commented  upon  below. 
The  American  tax  is  very  nearly  completely  dependent  on  the 
taxpayer's  own  declaration.  The  British  tax  depends  on 
declaration  in  only  one  of  the  five  schedules  and  for  the  super- 
taxes. The  British  tax  gives  the  taxpayer  a  jury  of  his  neigh- 
bours to  which  he  can  present  his  grievances.  The  American 
taxpayer  has  a  legal,  but  for  a  poor  man  otherwise  visionary, 
right  to  appeal  to  an  official  in  Washington,  sometimes  more 
than  three  thousand  miles  away,  but  no  other  appeal  short  of 
the  courts. 

Another  difference  often  made  much  of  between  different 
income  taxes  is  connected  with  the  mode  of  collection.  Some 
income  taxes  make  large  use  of  "  stoppage  at  the  source  " ; 


PERSONAL  TAXES:    POLL  AND  INCOME  TAXES       241 

Others  collect  directly  from  the  taxpayer.  Stoppage  at  the 
source  means,  for  example,  that  the  tenant  pays  the  tax  on  his 
landlord's  rent,  deducting  from  the  rent  the  amount  of  the  tax 
he  has  paid ;  or  again,  that  a  banker  or  other  agent  transmitting 
interest  or  other  income  pays  the  tax  for  his  client ;  and  simi- 
larly that  employers  may  be  required  to  pay  or  advance  the  tax 
on  salaries  of  their  employees.  Since  the  income  tax  is  usually 
progressive  or  graduated  and  since  there  are  usually  abatements 
or  exemptions  for  small  incomes,  it  is  obvious  that  stoppage  at 
the  source  necessitates  a  method  of  repayment  by  the  govern- 
ment of  any  excess  stopped  at  vthe  source.  There  is  also 
involved  a  declaration  by  the  taxpayer  to  determine  the  amount 
of  tax  he  should  pay  if  his  income  is  large  enough  to  carry  him 
into  the  higher  grade  rates.  Stoppage  at  the  source  seems  to 
work  to  the  apparent  satisfaction  of  the  Englishman.  Yet  a 
similar  system  in  America  failed.  Perhaps  its  failure  was  due 
to  the  imperfection  and  half-heartedness  of  the  administrative 
plans.  The  absence  of  any  adequate  repayment  scheme  for 
overcharges  added  to  the  dissatisfaction.  But  the  fact  that  the 
British  tax  is  largely  an  assessed  tax,  while  the  American  is  not, 
had  very  much  to  do  with  it.  The  substitution  in  the  United 
States  of  "  information  at  the  source  "  has  not  been  a  happy 
thought.  It  is  a  sort  of  informer  system,  making  folks  "  tattle- 
tales,"  and  involves  administrative  difficulties  far  more  costly 
in  the  long  run  than  any  returns  it  will  bring  in. 

Fitting  the  Tax  to  Custom.  —  An  income  tax,  possibly  more 
than  any  other,  but  certainly  quite  as  much,  must,  if  it  is  to 
work  smoothly,  be  skilfully  fitted  to  the  economic  organisation 
and  customs  of  the  country  in  which  it  is  to  be  used.  It  would 
be  useless,  for  example,  to  provide  that  each  owner  residing  in 
his  own  home  should  pay  a  tax  on  the  rental  value  of  the  home, 
if  all  homes  were  owned  and  none  rented.  For  it  would  then 
be  practically  impossible  to  ascertain  administratively  the 
rental  value.  Tenancy  has  to  be  the  normal  thing  before  such 
a  rule  will  work.  In  countries  where  interest  payments  are 
universally  made  through  banking  houses  and  trust  companies 
the  tax  thereon  can  be  stopped  at  the  source.     But  what  of  the 


242  INTRODUCTION  TO  PUBLIC   FINANCE 

village  grocer  who  has  a  sheaf  of  farmers'  notes  in  a  tin  box  on  a 
shelf  in  a  cupboard?  What  use  would  it  be  to  include  farm 
produce  consumed  on  the  farm  as  income,  in  neighbourhoods 
where  there  is  no  regular  market  and  no  known  local  price  for 
eggs,  chickens,  butter,  milk,  garden  truck,  pork  and  beef,  and 
other  things  on  which  the  farmer  lives  ? 

So,  too,  must  the  setting  of  the  income  tax  in  the  system  of 
other  taxes  be  carefully  considered.  There  are  persons  who 
advocate  a  different  rate  for  earned  and  unearned  incomes  in 
the  United  States  federal  income  tax,  after  the  model  of  Eng- 
land. They  seem  to  forget  that  the  recipients  of  funded  or 
unearned  incomes  pay  nearly  all  of  the  local  and  state  taxes, 
which  make  a  very  heavy  additional  burden. 

Net  Income.  —  Income  taxes  are  levied  on  net  income.  In- 
come tax  laws,  and  administrative  regulations  generally,  begin 
with  a  definition  or  statement  of  what  constitutes  gross  income, 
and  then  specify  the  deductions  which  may  be  made  therefrom 
in  order  to  arrive  at  net  or  taxable  income. 

Gross  income  broadly  speaking  includes  all  receipts  except 
of  pure  capital  assets,  as  by  inheritance,  or  bequest,  gift  or  pur- 
chase, or  life  insurance,  or  return  of  loans  or  compensation  for 
damages  of  a  capital  nature.  But  receipts  from  property  in- 
surance are  often  technically  treated  as  gross  income,  there 
being  allowed,  however,  an  offset  of  the  loss  incurred,  which 
in  most  cases  would  wipe  out  the  receipt.  While  life  insurance 
in  lump  sum  is  considered  afe  a  capital  payment,  annuities  are 
not  wholly  so  considered.  The  dividing  line  between  transfers 
of  capital  assets  sole,  and  those  which  are  not  capital  but  income, 
is  often  so  indistinct  that  both  the  laws  and  the  regulations  are 
very  specific  as  to  what  receipts  may  be  considered  as  excluded 
from  income. 

Exempt  Income.  —  From  gross  income  are  also  excluded  all 
forms  of  income  that  for  any  reason  may  be  exempt,  except, 
however,  those  so-called  exemptions  which  as  we  shall  see  are 
in  effect  a  part  of  the  system  of  rates.  People  are  sometimes 
surprised  to  find  that  they  have  income  which  they  spend,  but 
which  under  the  tax  law  is  not  regarded  as  income  at  all,  but 


PERSONAL  TAXES:    POLL  AND  INCOME  TAXES      243 

is  treated  legally  as  if  it  never  existed.  To  illustrate,  in  the 
United  States  up  to  the  present  writing  (1920)  it  is  considered 
unconstitutional  for  the  federal  government  to  tax  salaries  paid 
by  the  states  and  by  the  local  governments  which  derive  their 
powers  from  the  states.  This  includes  the  great  body  of  school 
teachers'  salaries.  Such  salaries  are  therefore  no  part  of 
gross  income,  but  are  treated  as  if  they  did  not  exist  at  all. 

Abatements  Which  are  Often  Called  Exemptions.  —  In  the 
United  States  a  man  living  with  his  wife  is  allowed  an  exemption 
of  $2000  and  $200  more  for  each  dependent.  These  exemp- 
tions are  deducted  after  the  net  income  is  determined  and  are 
in  effect  a  means  of  reducing  the  rate  he  pays.  The  $2000,  or 
more,  is  treated,  to  use  the  illuminating  term  of  the  statute,  as 
a  "  credit"  ;  that  is,  as  income  which  has  already  been  taxed. 
While,  so  far  as  the  individual  taxpayer  is  concerned,  it  is  a 
matter  of  unconcern  what  the  deduction  is  called,  yet  the 
purpose  is  very  different. 

The  deductions  allowed  in  arriving  at  net  income  from  gross 
may  be  grouped  as :  (i)  expenses,  including  interest  paid  out 
and  certain  taxes,  (2)  losses,  and  (3)  depreciation  of  capital 
assets. 

Deductible  Expenses.  —  Expenses  are  confined  to  business 
expenses.  That  is,  they  exclude  personal  spending  and  exclude 
investment  of  savings.  Personal,  living,  or  family  expenses  are 
never  deductible.  Neither  are  sums  paid  for  new  property, 
for  betterments,  sums  put  in  the  bank,  or  premiums  paid  for 
life  insurance.  Sometimes,  however,  the  latter  are  deductible, 
not  because  they  are  not  regarded  as  savings,  but  with  the 
intent  to  foster  this  sort  of  thrift.  Included  are  sums  paid  for 
labour,  rentals  for  the  use  of  business  property,  interest  on 
borrowed  capital  and  certain  taxes.  These  deductions  do  not 
seem  to  need  comment  except  the  taxes.  There  are  some  taxes 
which  are  obviously  incidental  to  doing  business  and  to  getting 
an  income.  Thus  an  imj^orter  must  pay  duties  and,  though  he 
may  reimburse  himself  when  he  sells  the  goods,  these  are  a  cost. 
Personal  taxes,  taxes  on  one's  home,  and  other  non-business 
taxes  should  not  be  deducted  any  more  than  any  other  personal 


244  INTRODUCTION   TO   PUBLIC   FINANCE 

expenses.  But  income  tax  laws  are  not  always  so  logical  as 
they  might  be  as  to  these,  perhaps  because  of  the  frequent 
intermingling  of  personal  and  of  business  taxes.  But  they  are 
logical  in  not  allowing  the  income  tax  itself  as  a  deduction. 
This  is  primarily  because  it  is  a  personal  tax  and  not  so  easily 
confused  with  business  taxes.  There  is  a  curious  and  inter- 
esting arithmetical  result  which  would  come  from  deducting 
the  income  tax  of  last  year  from  the  income  of  this  year.  This 
can  be  shown  strikingly  if  we  take  an  exaggerated  case.  Sup- 
pose a  man  has  a  taxable  income  of  $10,000  a  year,  something 
for  living  expenses  being  exempted,  and  that  war  necessities 
require  a  tax  of  100  per  cent.  If  allowed  to  deduct  the  income 
tax  of  this  year  from  his  next  year's  net  taxable  income  of 
$10,000  he  would  have  next  year  no  tax  to  pay.  But  the  third 
year  he  would  again  pay  a  big  tax.  With  lower  rates  the  result 
would  not  be  so  striking  but  would  be  there  in  a  degree.  Con- 
sequently, the  government's  revenue  would  go  up  and  down  each 
succeeding  year. 

That  business  losses  should  be  deducted  is  always  regarded 
as  proper.  But  the  propriety  of  deducting  other  losses  is  not 
so  clear.  This  is  especially  true  of  capital  losses,  as  was  dis- 
cussed above.  In  general,  losses  may  not  be  deducted  until 
fully  reahsed,  or  hke  bad  debts  "  written  off."  Upon  this  the 
regulations  must  obviously  be  very  strict.  A  difficulty,  usually 
resolved  in  favour  of  the  revenue,  arises  when  a  loss  exceeds  the 
income  of  the  year  in  which  it  is  to  be  deducted.  The  excess 
may  not  ordinarily  be  carried  forward. 

There  are  great  administrative  difficulties  in  the  allowances 
for  losses  and  there  are  still  greater  ones  in  the  allowances  for 
depreciation,  obsolescence,  and  depletion.  Repairs  to  property, 
especially  to  property  used  in  business,  are  obviously  necessary 
to  keep  the  property  efficient  and  the  income  flowing.  But  the 
line  between  a  repair  and  a  betterment  is  vague.  Obsolescence 
is  still  more  vague,  at  least  as  to  measurement.  The  main 
difficulty  here  is  that  obsolescence  is  considered  as  proceeding 
with  the  passage  of  time  and  at  the  end  of  a  period,  often  many 
years,  results  in  a  loss.     But  the  taxpayer  is  not  content  to 


PERSONAL  TAXES:    POLL   AND   INCOME  TAXES      245 

wait  until  the  loss  is  realised  and  measurable,  but  wants  it 
allowed  periodically.  Accountants  have,  very  properly,  been 
trying  to  train  the  business  world  to  a  conservative  estimate  of 
assets  and  to  the  exercise  of  care  in  the  preservation  of  capital. 
In  this  they  often  run  counter  to  an  equally  commendable 
desire  on  the  part  of  the  tax  officials  to  conserve  the  govern- 
ment's revenues.  The  controversy  leads  into  technicalities 
too  intricate  for  this  text. 

Depletion  of  exhaustible  and  limited  resources,  as  of  the 
content  of  a  mining  property  or  standing  timber,  gives  unending 
practical  troubles.  If  a  man  has  a  stock  of  leather  which  he  is 
using  up  to  make  shoes,  or  of  cotton  to  make  sheeting,  it  is 
clear  that  the  cost  of  materials  is  a  part  of  the  cost  of  manu- 
facture. By  analogy,  if  he  has  a  stock  of  coal  underground 
which  he  is  mining  and  turning  into  merchantable  coal  he  claims 
the  right  to  deduct  the  original  cost  of  the  coal  underground. 
So  far  the  matter  seems  simple  enough.  But  coal  underground 
is  not  bought  by  the  ton,  it  is  bought  sight  unseen,  quantity  but 
indefinitely  known.  Moreover,  costly  shafts,  tunnels,  and 
other  works  are  necessary  to  reach  it,  and  such  works  become 
useless  and  valueless  as  soon  as  the  mineral  they  reached  is 
gone.  The  practical  problem  this  presents  is  very  difficult  of 
solution  and  too  intricate  for  an  elementary  text.  RuHngs  and 
regulations  are  usually  wholly  arbitrary  and  hence  an  unending 
source  of  friction. 

Often  certain  gifts  or  contributions  to  charities,  to  churches, 
and  to  schools  are  allowed  as  deductions  from  income.  These 
deductions  rest  on  considerations  quite  apart  from  and  foreign 
to  taxation  principles  and  are  usually  limited  to  certain  frac- 
tions of  the  income. 

After  these  deductions  have  been  made  we  arrive  at  net 
income.  Sometimes  there  is  still  another  step  to  arrive  at  net 
taxable  income,  as  by  the  deduction  of  the  credits.  Bui  this 
is  rather  an  incident  to  the  application  of  the  rates  than  to  the 
determination  of  the  income. 

Rates  are  Degressive.  —  Income  tax  rates  are  usually  pro- 
gressive  and    the   form    of   progression   is   usually   degressive. 


246  INTRODUCTION  TO   PUBLIC   FINANCE 

Sometimes,  as  in  the  Prussian  income  tax,  there  is  a  complete 
scale  or  schedule  of  rates  set  forth  for  different  grades  of  in- 
comes. In  other  cases  there  is  a  flat  or  normal  rate,  as  it  is 
called,  applicable  to  all  incomes,  and  then  a  series  of  surtaxes 
applicable  to  the  higher  incomes.  Degression  is  usually  achieved 
by  the  simple  device  of  deducting  a  fixed  amount  from  the 
income  before  the  rate  is  apphed,  the  rate  on  the  remainder 
being  proportional.  So  far  as  the  surtaxes  are  concerned  they 
too  may  be  given  a  degressive  effect  by  applying  each  one  only 
to  the  "  excess  over  "  certain  amounts.  This  abstract  state- 
ment must  suffice  here.  The  subsequent  discussion  of  actual 
laws  will  afford  ample  illustrations  of  the  way  in  which  this 
result  is  achieved. 

The  universal  allowance  of  a  credit  or  so-called  exemption 
from  all  incomes  not  only  brings  about  the  progression  that  is 
desired  but  works  the  exemption  of  the  small  incomes.  Thus 
in  the  United  States  a  man  without  family  or  dependents  whose 
income  is  less  than  $1000  pays  personally  or  directly  no  tax 
at  all.  The  arguments  upon  which  this  exemption  rests  are : 
(i)  that  the  minimum  of  existence  can  pay  no  tax,  and  (2)  that 
there  are  other  taxes,  especially  the  taxes  on  consumption,  which 
impose  a  sufficient  burden  on  those  whose  incomes  are  small. 
Where  the  line  is  drawn  is,  of  course,  purely  arbitrary  and  a 
matter  of  opinion  in  each  country.  Countries  which  make 
large  use  of  consumption  taxes  should,  it  would  appear,  grant 
a  higher  exemption  than  those  which  levy  no  consumption 
taxes. 

Application  of  Income  Tax  to  Corporations.  —  Logically  the 
income  tax  if  it  is  intended  to  be  personal  in  character  should 
be  levied  on  individuals  only.  In  fact  any  other  system  leads 
to  cross  purposes,  double  taxation,  and  many  sorts  of  unpleasant 
inequalities.  This  is  especially  the  case  if  the  tax  is  to  be 
progressive  and  the  trouble  becomes  worse  as  the  progression 
is  intensified.  The  whole  theory  of  progression  rests  on  per- 
sonal ability  to  pay.  But  there  are  many  practical  considera- 
tions which  lead  to  the  le\y  of  a  tax  on  artificial  persons  or 
corporations.     Ease  of  assessment,  the  collection  of  large  sums 


PERSON.\L  TAXES:    POLL  AND  INCOME  TAXES      247 

at  one  time,  and,  by  going  directly  to  the  sources,  the  preven- 
tion of  evasion,  are  among  the  obvious  advantages.  The  tax 
on  corporation  incomes  is  usually  at  a  flat  rate.  If  any  so- 
called  exemption  or  deduction  from  the  net  income  is  allowed 
corporations,  as  $3000  or  $5000,  the  deduction  is  to  be  re- 
garded more  as  an  allowance  for  error  than  as  an  effort  to 
graduate  the  rate.     Progression  is  wholly  out  of  place  here. 

Tax  on  Dividends  May  Work  Inequality.  —  While  it  is  rela- 
tively easy  to  allow  the  taxpayer  a  credit  for  the  tax  paid  on  his 
dividends  by  the  company,  if  he  has  other  income  equal  to  or  in 
excess  of  his  personal  exemption,  it  is  not  so  easy  to  adjust  the 
burden  when  his  income  is  all  dividends,  or  largely  so.  Thus 
if  there  be  a  tax  on  the  earnings  of  corporations  amounting  to, 
say,  5  per  cent,  and  the  personal  income  tax  with  the  same 
tax  rate  allows  an  exemption  of  $1000,  then  a  man  whose  in- 
come is  all  from  dividends  would  not  benefit  by  the  personal 
exemption  at  all.  His  neighbour  whose  income  comes  from 
some  other  source  would  get  his  exemption  and  would  receive 
his  income  clear  of  tax  on  the  first  $1000.  The  only  way  in 
which  this  can  be  remedied  is  to  arrange  a  system  of  rebates 
such  as  was  mentioned  above  in  connection  with  stoppage  at 
the  source. 

Sec.  3.  The  Place  of  the  Tax  in  the  System.  —  The  form  of 
the  income  tax  will  be  determined  by  the  place  given  it  in  the 
system  of  taxation.  If  it  were  possiVjle  to  administer  a  single 
tax  of  any  sort  in  accord  with  the  demands  of  justice,  the  in- 
come tax  would  be,  theoretically,  the  one  to  be  chosen.  But  the 
objections  to  any  single  tax,  already  stated,  bear  upon  this 
as  well  as  upon  any  other.  Theoretically,  it  is  best  to  make 
the  income  tax  the  central  one  of  the  system,  the  gaps  of  which 
are  filled  in  by  other  taxes.  If  this  be  the  intention,  then  the 
income  tax  can  be  arranged  in  the  form  in  which  it  is  most  easy 
to  administer.  Thus  the  very  small  incomes  can  be  exempt  from 
the  income  tax,  being  covered  by  direct  and  indirect  consump- 
tion taxes.  In  this  way  one  source  of  difficulty  and  friction  is 
avoided.  Then  no  distinction  need  be  made  in  the  assessment 
of  income  from  different  sources.     For  if  it  ])e  decided  to  tax 


248  INTRODUCTION  TO    PUBLIC    FINANCE 

income  from  funded  investments  at  a  higher  rate  than  other 
forms  of  income,  this  additional  tax  can  be  laid  on  in  the  form  of 
a  property  tax.  How  far  the  exemption  of  smaller  incomes 
should  go,  or  to  what  extent  funded  incomes  should  be  more 
heavily  burdened,  depends  upon  the  concrete  facts  in  each 
case.  An  abatement  of  the  burden  in  cases  where  there  are 
already  more  than  the  usual  claims  on  the  income,  as  of  a  large 
family,  is  also  sometimes  given. 

Sec.  4.  Prussian  Income  Tax.  —  As  an  example  of  an  in- 
come tax,  not,  perhaps,  ideally  perfect,  but  still  laid  down  in 
accord  with  the  general  principles  enunciated  above,  we  will 
study  somewhat  in  detail  the  Prussian  pre-war  income  tax.^ 
In  order  to  have  in  mind  the  main  features  of  the  development 
already  outlined  above.  Chap.  V,  we  quote  from  Mr.  Hill  the 
successive  stages  in  the  growth  of  personal  taxation  in  Prussia : 

"  I.    A  uniform  poll  tax,  181 1. 

"2.  A  class  tax,  collecting  somewhat  more  from  the  prosper- 
ous, and  not  less  from  the  poor,  1820-1821. 

"3.  To  supplement  the  class  tax,  an  income  tax  with  com- 
paratively few  classes,  a  uniform  rate,  and  a  maximum  limit, 
1851. 

"  4.  Classification  made  finer,  the  maximum  limit  removed, 
and  the  class  tax  below  made  practically  an  income  tax  with  a 
progressive  rate,  and  the  exemption  of  incomes  up  to  420  M., 

1873. 

"5.    Exemption  of  incomes  up  to  900  M.,  reduction  of  the 

remaining  rates  of  the  class  tax,  and  of  the  two  lowest  rates  of 

the  income  tax,  1881-1883. 

"  6.  Principle  of  progression  extended  to  all  incomes  under 
100,000  M.,  incomes  under  10,000  M.  taxed  less  than  before, 
and  higher  incomes  more ;  a  declaration  of  income  by  the  tax- 
payer required,  and  a  finer  classification  adopted,  1891." 

To  make  the  new  tax  still  more  clear,  we  quote  the  rates 
from  the  law  itself : 

1  For  history  see  Hill,  Quarterly  Journal  of  Economics,  VI,  207;  Wagner,  "Die 
Reform  der  directen  Staatsbesteuerung  in  Preussen  im  Jahre  i8gi,"  Schanz'  Finanz 
Archiv.,  VIII  Jahrgang,  H  Band.     A  full  statement  of  the  law  is  there  appended. 


PERSONAL   TAXES:    POLL   AND   INCOME   TAXES       249 


TARIFF    OF    RATES 


Incomes 

Rate 

Incomes 

Rate 

From 

To  (inclusive) 

M. 

From 

To  (inclusive) 

M. 

M. 

M. 

M. 

M. 

900 

1,050 

6 

3,900 

4,200 

92 

1,050 

1,200 

9 

4,200 

4,500 

104 

1,200 

1,350 

12 

4,500 

5,000 

118 

1,350 

1,500 

16 

5,000 

5,500 

132 

1,500 

1,650 

21 

5,500 

6,000 

146 

1,650 

1,800 

26 

6,000 

6,500 

160 

1,800 

2,100 

31 

6,500 

7,000 

176 

2,100 

2,400 

36 

7,000 

7,500 

192 

2,400 

2,700 

44 

7,500 

8,000 

212 

2,700 

3,000 

52 

8,000 

8,500 

232 

3,000 

3,300 

60 

8,500 

9,000 

252 

3,300 

3,600 

70 

9,000 

9,500 

276 

3,600 

3,900 

80 

9,500 

10,500 

300 

The  rate  increases 


From 
M. 

To 
M. 

In  Stages  of 
M. 

By 

M. 

10,500 

30,500 

1,000 

30 

30,500 

32,000 

1,500 

60 

32,000 

78,000 

2,000 

80 

78,000 

100,000 

2,000 

100 

In  the  case  of  incomes  from  100,000  M.  to  105,000  M.  the  tax  is 
4000  M.  And  from  that  point  on  the  proportional  rate  of  4  per 
cent  is  assessed  upon  the  lower  limits  of  stages  of  5000  M.  each. 
This  rate  is  progressive  from  about  two-thirds  of  i  per  cent 
at  900  M.  to  3  per  cent  at  10,000  M.  Then  the  rate  is  nearly 
proportional  at  3  per  cent  up  to  30,000  M.  Then  progressive 
again,  until  at  100,000  M.  4  per  cent  is  reached,  after  which  it 
is  proportional  again.  Each  taxpayer  having  an  income  of 
over  3000  M.  is  required  to  "  declare  "  it.  He  has  to  fill  out  a 
blank  calling  for  a  statement  of  income  from  each  of  four  .sources : 
(i)  from  capital  invested,  interest,  and  dividends;    (2)  from 


250  INTRODUCTION  TO   PUBLIC   FINANCE 

landed  property  and  houses,  including  all  crops,  whether  con- 
sumed in  the  house  or  not,  but  deducting  the  cost  of  cultivation ; 
(3)  from  trade,  industry,  or  mining,  deducting  the  cost  of  main- 
tenance ;  (4)  from  any  employment,  wages,  salaries,  fees,  and 
including  pensions  and  every  source  of  income  not  covered  by 
(i),  (2),  and  (3).  Deductions  are  allowed  (i)  for  interest  on 
debts,  except  that  on  business  debts ;  (2)  for  permanent  legal 
burdens  (example,  maintenance  of  reserves) ;  (3)  contributions 
to  sick  funds ;  (4)  life-insurance  premiums.  This  division  of 
the  income  into  different  parts  is  for  the  sake  of  accuracy  of 
declaration,  not  for  the  sake  of  assessing  different  rates  on  the 
different  kinds  of  income. 

Persons  with  large  dependent  families  or  labouring  under 
any  special  economic  conditions  seriously  affecting  their  faculty 
are  allowed  an  abatement  of  not  more  than  three  grades,  pro- 
vided their  incomes  are  not  over  9500  M.  Persons  having  less 
than  3000  M.  deduct  50  M.  for  each  child  under  fourteen  years 
of  age,  and  if  there  are  three  such  children,  a  reduction  of  one 
grade  is  made. 

Corporations  and  stock  companies  pay  the  income  tax  on  all 
dividents  over  3^  per  cent.  This  makes  double  taxation  of  this 
income,  which  is  regarded  as  particularly  "  capable."  In  other 
ways  the  attempt  is  made  to  tax  funded  income  more  heavily. 
The  exemption  of  incomes  below  900  M.  ($225)  and  the  lower 
rate  for  smaller  incomes  is  justified  on  the  ground  that  the  con- 
sumption taxes  already  impose  a  burden  on  these  persons. 

The  assessment  of  the  tax  is  not  perfect.  It  is  said  to  be 
considerably  better,  however,  than  the  assessment  of  property 
in  America.  Large  incomes  escape  in  part.  It  has,  however,  an 
advantage  in  that  the  evasion  of  the  tax  does  not  in  Prussia,  as  it 
does  in  America,  intensify  existing  differences  and  inequalities. 
Other  parts  of  the  system  tend  to  offset  the  failure  in  this  case. 

Sec.  5.  British  Property  and  Income  Tax.  —  The  British 
income  tax,  correctly  called  "  the  property  and  income  tax," 
may  serve  as  another  illustration,  but  it  differs  very  much  from 
the  Prussian.  We  follow  the  pre-war  form  of  the  tax  as 
obviously  better  for  illustrative  purposes  than  the  abnormal  war 


PERSONAL   TAXES:    POLL  AND   INCOME  TAXES        251 

lax.  In  the  first  place,  as  has  already  been  stated,  it  is  rather  a 
system  of  taxes  on  revenue  than  a  tax  on  the  aggregate  income 
of  each  person.  It  is  a  system  of  modified  property  taxes, 
mth  a  wage  and  salary  tax  appended.  In  Prussia  the  inten- 
tion is  to  make  the  total  income  the  base  irrespective  of  the 
source,  and  reference  to  the  sources  is  called  for  in  the  declara- 
tion merely  as  a  means  of  getting  at  the  total  with  greater  accu- 
racy. In  England  the  different  sources  are  kept  strictly  apart, 
and  there  is  a  difference  made  in  the  treatment  of  each  kind  of 
income,  the  tax  being  in  some  cases  "  stopped  at  the  source." 
The  total  income  is  with  some  exceptions  called  into  use  only  in 
estimating  the  exemptions  and  abatements.  The  taxpayer  has 
the  right  by  summing  up  his  whole  income  to  show  that  he  has 
been  taxed  too  much,  or  is  entitled  to  exemption.  In  that 
case  he  is  reimbursed.  In  1907-1908  the  abatements  proper 
amounted  to  £885,670;  exemptions  on  account  of  small  in- 
comes amounted  to  £886,134.  The  total  abatements  of  all 
sorts,  £2,798,289.  So  separate  are  the  different  parts  of  this 
tax  that  Mr.  Wilson  says  of  it :  ^  "To  the  bulk  of  the  people 
it  is  known  in  its  most  obnoxious  (?)  form  as  a  tax  upon  ordi- 
nary incomes,  salaries,  professional  earning,  profits  of  trading, 
etc."  Bastable  (p.  449)  says :  "  Inequalities  are,  however, 
removed  by  the  comprehensiveness  of  the  tax." 

The  various  revenues  are  taxed  in  five  "  schedules,"  known  as 
Schedules  A  to  E. 

The  following  outline  of  these  schedules  from  the  Acts  of 
1842  and  1853,  with  subsec^uent  amendments,  is  taken  mainly 
from  Williams'  The  King's  Revenue,  a  most  admirable  compila- 
tion, which  should  be  frequently  consulted  by  every  student 
of  British  finance. 

^^  Schedule  A.  —  For  and  in  respect  of  the  property  in  all 
lands,  tenements,  hereditaments,  and  heritages  in  the  United 
Kingdom,  and  to  be  charged  for  every  twenty  shiUings  ^  of  the 
annual  value  thereof : 

'  P.  IIS,  National  Budget.     Cf.  Stamp,  British  Incomes  and  Property. 
*  Sec  below  for  "deductions"  allowed.     Under  B  only  one-third  the  annual  value 
is  now  charged.     The  text  gives  the  old  law. 


252  INTRODUCTION  TO  PUBLIC  FINANCE 

"  Schedule  B.  —  For  and  in  respect  of  the  occupation  of  all 
such  lands,  tenements,  hereditaments,  and  heritages,  as  afore- 
said, and  to  be  charged  for  every  twenty  shillings  ^  of  the  annual 
value  thereof : 

"  Schedule  C.  —  For  and  in  respect  of  all  profits  arising  from 
interest,  annuities,  dividends,  and  shares  of  annuities  payable 
to  any  person,  body  politic  or  corporate,  company  or  society, 
whether  corporate  or  not  corporate,  out  of  any  public  revenue, 
and  to  be  charged  for  every  twenty  shiUings  of  the  annual 
amount  thereof : 

"  Schedule  D.  —  For  and  in  respect  of  the  annual  profits  or 
gains  arising  or  accruing  to  any  person  residing  in  the  United 
Kingdom  from  any  kind  of  property  whatever,  whether  situate 
in  the  United  Kingdom  or  elsewhere,  and  for  and  in  respect  of 
the  annual  profits  or  gains  arising  or  accruing  to  any  person 
residing  in  the  United  Kingdom  from  any  profession,  trade, 
employment,  or  vocation,^  whether  the  same  shall  be  respectively 
carried  on  in  the  United  Kingdom  or  elsewhere,  and  to  be 
charged  for  every  twenty  shillings  of  the  annual  amount  of  such 
profits  and  gains : 

"  And  for  and  in  respect  of  the  annual  profits  or  gains  arising 
or  accruing  to  any  person  whatever,  and  whether  a  subject  of 
His  Majesty  or  not,  although  not  resident  within  the  United 
Kingdom,  from  any  property  whatever  in  the  United  King- 
dom, or  any  profession,  trade,  employment,  or  vocation,  ex- 
ercised within  the  United  Kingdom,  and  to  be  charged  for  every 
twenty  shillings  of  the  annual  amount  of  such  profits  and  gains  : 

"  And  for  and  in  respect  of  all  interest  of  money,  annuities, 
and  other  annual  profits  and  gains  not  charged  by  virtue  of 
any  of  the  other  schedules  contained  in  this  Act,  and  to  be 
charged  for  every  twenty  shillings  of  the  annual  amount 
thereof : 

"  Schedule  E.  —  For  and  in  respect  of  every  public  office  or 
employment  of  profit,  and  upon  every  annuity,  pension,  or 
stipend  payable  by  His  Majesty  or  out  of  the  public  revenue 

1  See  footnote,  page  251. 

2  See  lower  rates  for  "earned"  incomes,  explained  below. 


PERSONAL   TAXES:     POLL   AND   INCOME  TAXES         253 

of  the  United  Kingdom,  except  annuities  charged  to  the  duties 
under  the  said  Schedule  C,  and  to  be  charged  for  every  twenty 
shilhngs  of  the  annual  amount  thereof." 

All  incomes  not  exceeding  £160  are  exempt.  The  following 
"  abatements  "  are  allowed  on  all  classes  of  income:  £160  on 
all  incomes  exceeding  £160  and  not  exceeding  £400;  £150 
on  incomes  exceeding  £400  and  not  exceeding  £500;  £120  on 
all  incomes  exceeding  £500  and  not  exceeding  £600 ;  £70 
on  all  incomes  exceeding  £600  and  not  exceeding  £700.^ 

The  following  "  deductions "  (not  called  abatements)  are 
allowed  under  Schedule  A,  namely,  one-eighth  in  respect  of 
lands,  and  one-sixth  in  respect  of  houses  for  repairs,  etc.  That 
is,  income  from  lands  is  charged  at  175.  6d.  for  each  pound,  and 
that  from  buildings  at  165.  Sd.  per  pound. 

"  Relief,"  in  the  form  of  a  reduced  rate,  is  given  by  an  act 
passed  in  1907  to  "  earned  "  incomes,  in  addition  to  all  other 
exemptions,  abatements,  or  deductions.  "  Earned "  income 
means  — 

(c)  "  any  income  arising  in  respect  of  any  ofhce  or  employ- 
ment of  profit  held  by  the  individual,  or  in  respect  of  any  pension, 
superannuation,  or  other  allowance,  deferred  pay,  or  compen- 
sation for  loss  of  office  given  in  respect  of  the  past  services  of 
the  individual  or  of  the  husband  or  parent  of  the  individual, 
in  any  office  or  employment  of  profit  .  .  . ;   and 

(b)  "  any  income  from  any  property  which  is  attached  to 
or  forms  part  of  the  emoluments  of  any  ofiice  or  employment  of 
profit  held  by  the  individual ;  and 

(c)  "  any  income  which  is  charged  under  Schedule  B  or  D, 
and  is  immediately  derived  by  the  individual  from  the  carry- 
ing on  or  exercise  by  him  of  his  profession,  trade,  or  vocation, 
either  as  an  individual,  or,  in  the  case  of  a  partnership,  as  a 
partner  acting  therein." 

This  "  relief  "  extends  only  to  earned  incomes  up  to  £2000. 

The  reader  should  note  the  careful  distinction  made  in  the 
law  between  "  persons "  and  "  individuals."  The  former 
includes  legal  persons,  such  as  joint  stock  companies  and  cor- 

'  All  pre-war. 


254  INTRODUCTION  TO  PUBLIC   FINANCE 

porations  other  than  governmental.  This  is  especially  impor- 
tant under  Schedule  D. 

"  The  annual  value  of  lands,  etc.,  charged  under  Schedule 
A,  is  understood  to  be  the  rent  by  the  year  at  which  the  same 
are  let  at  rack-rent,  if  the  amount  of  such  rent  shall  have  been 
fixed  by  agreement  commencing  within  the  period  of  seven  years 
preceding  the  fifth  day  of  April  next  before  the  time  of  making 
the  assessment,  but  if  the  same  are  not  so  let  at  rack-rent, 
then  at  the  rack-rent  at  which  the  same  are  worth  to  be  let 
by  the  year."  This  rule  does  not  apply  to  tithes,  quarries, 
mines,  etc.,  but  does  apply  to  lands,  etc.,  capable  of  actual 
occupation,  no  matter  how  enjoyed. 

"  Only  one- third  of  the  annual  value  is  charged  under  Schedule 
B;  nurseries  and  gardens  are  charged  under  Schedule  D." 
Mortgages  are  taxed  under  Schedule  A,  owners  being  allowed 
to  deduct  what  they  advance  in  taxes  from  the  interest  they  pay. 
Owners  in  occupation  pay  under  Schedule  B. 

Clergymen  or  ministers  of  religion  are  allowed  a  deduction 
of  one-eighth  on  the  value  of  any  dwelling-house  for  which  they 
pay  rent,  in  respect  of  the  portion  of  it  which  they  may  use  for 
oflScial  purposes. 

The  greatest  difiiculties  of  assessment  arise  under  Schedule 
D,  and  in  1907  the  assessors  were  empowered  to  require  an 
employer  to  give  particulars  of  name,  residence,  and  pay  of  any 
employees,  and  every  person  is  made  liable  to  be  called  upon 
to  make  a  full  return  of  his  or  her  income.  Normally  the  in- 
come taxable  is  the  average  of  the  profits  or  gains  for  the  past 
three  years,  but  if  the  taxpayer  so  elect,  he  may  be  assessed 
on  the  actual  amount  of  profits  and  gains  for  the  year.  Com- 
missioners are  empowered  to  make  deductions  in  respect  of 
"  wear  and  tear  "  of  machinery  or  plant  used,  and,  generally 
speaking,  the  assessable  profits  are  what  are  left  after  deduction 
of  all  outgoings  attributable  to  the  expenses  of  materials, 
labour,  etc.  Individuals  are  allowed  to  deduct  fife  insurance 
premiums  paid. 

Many  of  the  terms  used  in  the  schedules  as  quoted  above 
will  probably  be  unintelligible  to  American  readers,  as  some  of 


PERSONAL  TAXES:    POLL  AND  INCOME  TAXES       255 

the  forms  of  income  to  which  they  apply  are  not  found  in  the 
United  States,  or  at  least  are  not  commonly  recognised  as  dis- 
tinct classes.  On  that  account  the  following  exhibit  of  the 
amount  of  income  "  brought  under  review  "  by  the  department 
administering  this  tax  will  probably  prove  instructive.  The 
details  of  gross  income  are  for  the  fiscal  year  1905-1906  and 
the  whole  table  is  from  Williams'  The  King's  Revenue. 

Schedule  A.     Profits  from  the  ownership  of  : 

Lands £52,151,543 

Houses 205,486,455 

Other  Property 1,310.673 

£258,948,671 
ScJtedide  B.     Profits  from  the    occupation    of    lands 

(farmers' profits  mainly) 17,460,062 

Sclicdide  C.     Profits  from  British,  Indian,  colonial,  and 

foreign  government  securities 46,925,674 

Sdwdulc  D.  Profits  from  businesses,  concerns,  profes- 
sions, employments  (except  the  last  of  a  public  nature, 
see  Schedule  E)  and  certain  interest : 

I.  Businesses,  professions,  etc. 
(including  salaries  of  em- 
ployees), other  than  those 
enumerated  below  .  .  .  £367,814,155 
11.  Railways  in  the  United  King- 
dom      41,241,692 

III.  Mines 19,999,972 

IV.  Gasworks       7,413,611 

V.    Iron  works 2,683,637 

VI.   Water  works 5,816,300 

VII.    Canals,  etc 3,847,201 

VIII.   Quarries 1,695,799 

IX.   Markets,  tolls,  etc 869,635 

X.   Fishings  in  the  United  King- 
dom and  sporting  rights  in 

Ireland 203,304  ^ 

XI.    Cemeteries 183,612 

XII.    Salt    springs    or    works    and 

alum  works 150,5 73 

XIII.  Indian,  colonial,  and  foreign 

securities  {pUicr  than  gov- 
ernment)        14,794,821 

XIV.  Coupons 12,061,156 

XV.    Railways  out  of   llic  United 

Kingdom 16,111,221 


Curried  forward  £323>334>407 

»  Some  sporting  rights  arc  under  Schedule  A. 


256 


INTRODUCTION  TO   PUBLIC   FINANCE 


Brought  forward 
XVI.   Loans  secured  on  the  public 

rates £6,687,134 

XVII.   Other  interest 4,677,654 

XVm.    Other  profits 2,399,047 

XIX.  Profits  from  the  occupation  of 
lands,  the  occupiers  of 
which  have  elected  to  be 
assessed  under  ^c/ifJ^/e  Z)  .  13,821 

ScJwdide  E.     Salaries  of  government,  corporation,  and 
public  company  officials       

Total  gross  income  brought  under  review  1905-1906     . 
Less  deductions,  abatements,  etc.       .     .     . 

Taxed  income 


£323,334,407 


508,664,345 
93,185,804 

£925,184,556 
293.159,810 

£632,024,746 


HYPOTHETICAL  CASE  OF  A  COMPOSITE  INCOME 

See  Page  257 


Reference 
Number 

Schedule 

Item 

Amount 

I 

A 

Profits  from  the  ownership  of  lands,  houses, 

etc. 

£500 

2 

B 

Profits  from  the  occupation  of  lands  at  one- 

third  the  annual  \alue 

200 

3 

C 

Profits  from  government  securities 

200 

4 

D 

Profits  as  an  author 

100 

5 

D 

Profits  as  a  solicitor  (partner  in  a  firm  — 

total  profits,  £5000) 

2500 

6 

D 

Profits  from  investments  in  a  public  com- 

pany (total  profits,  £55,000) 

500 

7 

•D 

Profits  from  investments  in  municipal  stock 

100 

8 

D 

Profits  from  investments  in  foreign  bonds 
payable  by  coupons  cashed  in  the  United 

Kingdom 

100 

9 

D 

Salary  as  a  land  agent 

500 

10 

E 

Salary  as  a  borough  auditor  j 

300 

Total 

£5000 

The  income  taxes  are,  whenever  possible,  "  stopped  at  the 
source,"  that  is,  they  are  paid  to  the  government  before  the 
income  (the  rents,  interest,  salaries,  etc.)  is  paid  over  to  the 
recipient.  This  has  long  been  considered  the  characteristic 
feature  of   the  British  income  tax.     Williams  estimates  that 


PERSON.\L   TAXES:    POLL   AND   INCOME  TAXES      257 

two-thirds  of  the  taxes  are  thus  indirectly  collected.  Stoppage 
at  the  source  applies  to  practically  all  of  Schedule  A  and  to  all 
of  Schedules  C  and  E.  On  account  of  the  definiteness  of  in- 
comes under  Schedule  B  the  collection  is  equally  certain.  Even 
under  Schedule  D  many  items  can  be  stopped  at  the  source. 

The  hypothetical  case  of  a  composite  income  of  £5000  per 
annum  by  Williams  given  on  page  256  will  illustrate  some  of  the 
more  puzzling  points. 

The  methods  of  taxing  items  1,2,  and  3  are  simple  and  require 
no  explanation. 

Item  4  is  income  as  an  individual  and,  although  not  over 
£160,  is  not  exempt  because  this  individual's  total  income  is 
over  £160.  It  is,  however,  "  earned  "  income  and  would  be 
entitled  to  "  relief  "  but  for  the  fact  that  the  total  of  this  indi- 
vidual's income  is  over  £2000. 

Item  5  requires  no  explanation. 

Item  6  is  income  on  which  the  tax  would  be  paid  by  the 
company,  as  a  "  person  "  having  income  beyond  the  limits 
of  any  abatements,  that  is,  £55,000,  the  highest  sum  entitled 
to  abatement  being  £700.  If  the  hypothetical  individual  in 
this  case  had  less  than  £700,  instead  of  £5000  income,  he  would 
receive  abatement  on  this  item.  Technically  this  tax  is  collected 
directly  and  not  "  stopped  at  the  source,"  but  so  far  as  the  indi- 
vidual is  concerned,  the  effect  is  much  the  same.  This  is  the 
only  item  "  net,"  less  the  tax  appearing  in  the  list. 

The  taxes  on  all  the  remaining  items,  7  to  10  inclusive,  are 
"  stopped  at  the  source,"  that  on  8  being  withheld  by  the 
banker  or  broker  when  he  cashes  the  coupons. 

The  income  tax  is  the  variable  element  in  British  finance,  and 
the  rate  is  fixed  each  year  with  reference  to  the  needs  of  the 
government.  From  1896  to  1900  the  rate  was  M.  in  the  pound  ; 
1900-1901,  IS.;  1901-1902,  IS.  2d.;  1902-1903,  15.  3J. ;  1903- 
1904,  lid.;  1904-1908,  15. 

The  rates  of  the  British  income  tax  are  very  difficult  to  state. 
But  if  ons  bears  in  mind  the  history  of  the  rates  he  has  a  clew 
to  what  is  otherwise  something  of  a  labyrinth.  That  history 
we  shall  try  to  state. 


258  INTRODUCTION  TO  PUBLIC   FINANCE 

History  of  British  Income  Tax  Rates.  —  There  was  originally 
but  one  rate,  a  flat  rate.  Graduation,  or  degression  in  the 
effect  of  the  rate  after  the  fashion  illustrated  in  our  chart  in 
Section  8  of  Chapter  II  of  Part  II  in  tlys  book,  was  achieved  by- 
deducting  a  series  of  "  abatements  "  from  the  net  income, 
larger  abatements  being  allowed  for  smaller  incomes  and  all 
abatement  stopping  at  a  moderately  large  income,  formerly 
£700.  The  old  abatements  are  given  just  above.  This  flat 
rate  expressed  originally  as  so  and  so  many  pence  in  the  pound, 
and  lately,  as  it  rose,  in  shillings  and  pence  in  the  pound,  was 
called  "  the  income  tax,"  or  the  "  standard  rate."  This  is  the 
rate  "  stopped  at  the  source."  Whfle  this  rate  is  to-day  only  a 
point  of  departure,  there  being  lower  and  higher  rates  as  well, 
it  is  still  thought  of  as  the  income  tax.  When  it  was  decided 
to  make  a  difference  in  the  treatment  of  earned  incomes,  from 
that  accorded  unearned  incomes,  nothing  other  was  at  first 
disturbed  in  the  old  law,  but  the  result  desired  was  attained  by 
granting  a  "  relief "  to  the  earned  incomes.  A  "  relief " 
differed  from  an  "  abatement "  in  that  it  was  a  reduced  rate, 
while  an  abatement  was  a  deduction  from  income.  In  1909  a 
supertax  of  bd.  in  the  pound  on  the  excess  over  £3000  for  all 
incomes  which  exceeded  £5000  was  imposed.  So  far  the 
matter  was  comparatively  simple.  Nor  does  it  especially  com- 
plicate matters  that  there  are  personal  exemptions  granted 
married  persons  of  £25  and  to  all  persons  of  £25  for  each  de- 
pendent. 

But  further  changes  came  in  as  the  income  tax  rate  was 
raised.  Among  them  were  ultimately:  (i)  a  graduation  of  the 
"  relief,"  (2)  the  imposition  of  a  supertax  on  large  incomes, 
(3)  the  graduation  of  the  supertax,  and  (4)  a  relief  to  small 
unearned  incomes.  Including  only  these  features  the  rates  could 
be  stated  in  two  series,  one  a  low  series  for  earned  and  another 
higher  series,  up  to  a  certain  point,  for  unearned  incomes.  At 
a  comparatively  high  point  the  two  series  merged.  But  that 
very  doubling  of  the  series  and  merging  brought  another  com- 
plication. Many  incomes  are  partly  earned  and  partly  un- 
earned.    So   adjustment  of   abatements  and  reliefs  came  in. 


PERSONAL   TAXES:    POLL   AND   INCOME  TAXES      259 

The  ultimate  resulting  complex  is  distinctly  appalling.  It  is 
comforting  to  note  that  even  British  officials  have  difficulty 
with  it.  They  resort  to  so-called  "  effective  rates  "  or  percent- 
ages computed,  with  due  allowance  for  all  the  modifying  "  allow- 
ances," "  reliefs,"  graduations  and  supertax  and  thus  show 
what  the  actual  rate  to  be  paid  is  at  each  point.  The  one 
thing  to  cling  to,  however,  is  the  notion  that  there  is  a  sort  of 
theoretical  belt-line  to  which  the  income  tax  applies  and  that 
all  other  rates  start  downward  or  upward  from  there.  Yet  in 
fact  only  unearned  incomes  between  £2000  and  £2500  now  (1920) 
pay  exactly  the  standard  rate  and  no  more,  no  less.  There  is 
finally  one  more  complication  and  that  is  that  the  rates  at  cer- 
tain points  "  kick  back  "  or  recoil  like  an  old-fashioned  muzzle- 
loading  musket.  Thus,  for  example,  an  income  of  £130  was  for 
the  war  tax  exempt.  But  one  of  £131  did  not  receive  an  abate- 
ment of  £130  as  might  perhaps  be  expected,  but  of  only  £120, 
and  was  taxable  on  £11,  at,  of  course,  the  lowest  rate  of  its  class 
be  it  earned  or  unearned.  In  like  manner  an  income  of  £3000 
paid  at  one  time  no  supertax.  But  an  income  of  a  little  over 
£3000  paid  the  supertax  not  only  on  the  excess  over  £3000, 
but  on  £500  above  £2500  as  well.  The  same  feature  occurs 
at  many  other  points  in  the  scale.  To  mitigate  the  harshness 
of  this  kick-back  the  taxpayer  is  allowed  to  make  a  present  to 
the  government  of  the  margin  by  which  his  income  exceeds  a 
certain  limit  and  would  thus  carry  him  into  a  higher  effective 
tax  rate,  and  then  to  calculate  his  tax  as  though  his  income  were 
within  the  limit.  So  the  amount  paid  on  £131,  which  as  a  tax 
would  figure  out,  literally,  245.  and  gd.,  is  reduced  to  £1.  That 
is,  the  taxpayer  gives  the  government  the  extra  £1  over  £130 
and  then  claims  exemption.  At  £701  this  reduces  the  tax  from 
£87  125.  6d.  to  £75  12s.  6d.  plus  the  £1  donated  to  the  govern- 
ment or  in  all  to  £76  125.  6d.,  which  is  a  considerable  reduction. 
At  £712  or  £713  it  becomes  a  matter  of  indifference  which 
calculation  is  used. 

With  the  foregoing  as  a  clew  we  may  now  enter  the  labyrinth. 
In  T014  the  annual  budget,  adopted  just  before  the  war  broke 
out,  fixed  the  income  tax  at  is.  7,d.  in  the  pound  and  the  super- 


26o  INTRODUCTION   TO   PUBLIC   FINANCE 

tax  which  had  before  that  been  simply  6c?.  in  the  pound  on 
incomes  over  £5000,  but  computed  on  all  over  £3000,  was 
graduated  for  all  incomes  over  £3000.  The  "  abatements  " 
were  £160,  if  the  total  income  did  not  exceed  £400;  £150  on 
incomes  between  £400  and  £500;  £120  on  incomes  between 
£500  and  £600;  and  £70  on  incomes  between  £600  and  £700. 
Earned  incomes  received  relief  as  follows:  If  under  £1000  they 
paid  only  gd.  ;  if  between  £1500  and  £2000,  is.;  if  between 
£2000  and  £2500,  15.  2d.,  and  above  that  came  under  the  full 
rate,  and  when  the  income  exceeded  £3000  the  supertaxes 
applied.  The  rates  of  the  supertax  were  graduated  from  ^d. 
in  the  pound  on  the  first  £500  below  £3000 ;  'jd.  on  each  pound 
over  £3000  up  to  £4000 ;  gd.  between  £4000  and  £5000  and  so 
on,  reaching  finally  a  maximum  supertax  equal  to  the  income 
tax  rate  plus  a  penny  on  all  income  over  £7000.  But  after  the 
war  broke  out,  in  November,  1914,  the  income  tax  was  doubled 
and  so  were  the  relief  rates  and  the  supertax  rates. 

The  War  Income  Tax  Rate.  —  As  war  needs  increased  the 
rates  rose,  finally  reaching  6s.  in  the  pound  as  the  income  tax, 
and  a  graduated  supertax  reaching  45.  6d.  on  the  excess  over 
£10,000.  Earned  incomes  beginning  at  £131  with  abatement 
of  £120  paid  2s.  3^/.  up  to  £500,  the  other  abatements  dropping 
to  £100  between  £400  and  £600  and  to  £70  between  £600  and 
£700 ;  then  the  relief  rates  rose  to  35.  o^.  between  £500  and 
£1000;  35.  gd  from  £1000  to  £1500;  45.  6^/.  from  £1500  to 
£2000;  55.  3^.  from  £2000  to  £2500,  after  which  the  income 
tax  of  6s.  came  in,  while  the  supertax  began  at  £3000,  strik- 
ing back  on  the  first  £500.  At  the  same  time  relief  was  also 
accorded  to  small  unearned  incomes,  namely,  at  35.  up  to  £500 ; 
35.  gd.  between  £500  and  £1000;  45.  6d.  between  £1000  and 
£1500;  55.  3(/.  between  £1500  and  £2000;  after  which  the  in- 
come tax  of  6s.  applied,  and  also  the  supertaxes  as  per  the  scale 
above.  It  should  be  understood  that  each  higher  rate  applies 
only  to  the  excess  over  the  amount  to  which  the  previous  rate 
applied ;  also  that  mixed  incomes  received  only  proportionate 
abatements  and  reliefs.  The  war  taxes  reached  down  to 
workers  receiving  as  low  as  two  pounds  ten  shillings  a  week, 


PERSONAL  T.\XES:    POLL  AND   INCOME  TAXES        261 

and  took  from  them  two  and  a  half  days'  wages  each  year. 
The  supertax  began  with  is.  on  £500  in  every  income  of  £2500 
or  more,  and  is.  6d.  in  £500  on  every  income  of  £3000  and  rose 
by  6d.  for  each  additional  £1000  up  to  £10,000,  so  that  it  was 
45.  6d.  on  the  excess  over  £10,000.  The  highest  rate  was 
therefore  6s.  plus  4.S.  6d.  or  105.  6d.  less  the  effect  of  the  abate- 
ments and  reliefs. 

The  result  of  all  this  was  a  slightly  irregular  degressive  rate 
rising  ver}'-  sharply  below  the  6s.  belt  line,  and  approaching  as 
an  ultimate,  but  never  quite  attainable,  limit  los.  6d.  in  the 
pound  or  52^  per  cent.^  It  is  interesting  to  note  that  the 
vertical  increases  shown  on  the  chart,  page  79  of  this  book, 
have  been  materially  modified  by  the  interaction  of  the  new 
abatements  and  graduated  reliefs,  and  that  if  the  new  "  effec- 
tive "  rates  are  plotted  the  curve  is  much  smoother  although 
still  showing  many  abrupt  changes. 

Before  leaving  the  British  income  tax  there  is  one  point 
which  may  be  mentioned,  since  the  British  tax  in  many  of  its 
'  schedules  is  imposed  on  the  annual  value  of  property,  all  ques- 
tions as  to  the  increment  value  of  property  are  thereby  auto- 
matically settled.  Only  when  an  increment  value  becomes  part 
of  the  "  annual  profits  and  gains  "  under  Schedule  D,  and  then 
usually  only  as  to  persons  whose  income  is  made  by  regular 
trading  in  stocks,  bonds,  lands,  and  other  capital  investments, 
would  an  increment  in  capital  value  be  likely  to  come  under 
the  income  tax. 

The  Administration  of  British  Income  Tax.  —  The  assessment 
of  the  British  income  tax  is  under  the  immediate  direction  of 
the  local  Commissioners  of  Income  Tax,  who,  save  in  the 
cities,  are  men  of  property.  There  is  a  commission  in  each  of 
twenty-two  districts  or  divisions.  The  commissioners  are  ap- 
pointed by  the  old  Land  Tax  Commissioners,  named  by  Parlia- 
ment. The  actual  work  of  assessment  is  done  by  assessors 
appointed  by  the  commissioners.     The  assessors  report  back  to 

'  .\  Royal  Commission  is  at  work  now,  1020,  on  a  plan  inrluclinR,  among  other 
things,  the  smoothing  out  of  the  idiocyncracies  of  the  rates  resulting  from  piecemeal 
amendments. 


262  INTRODUCTION  TO   PUBLIC   FINANCE 

the  commissioners,  whose  clerk  writes  up  the  assessment  roll. 
But  their  work  is  confined  primarily  to  assessments  of  income 
under  Schedules  A,  B,  D,  and  E,  not  presenting  special  diffi- 
culties and  for  which  there  is  stoppage  at  the  source.  Special 
commissioners  assess  railroads,  insurance  companies,  and  other 
matters  not  local,  and  especially  the  supertax.  Assessments 
under  Schedule  C  are  made  by  the  "  Commissioners  for  Public 
Offices."  But  there  are  Surveyors  or  Inspectors  appointed 
directly  by  the  Treasury  or  by  the  Board,  that  is,  the  Com- 
missioners of  Inland  Revenue,  who  also  make  many  assessments 
which  the  local  commissioners  cannot  well  manage,  and  who  in 
particular  unify  and  systematise  all  the  work  of  the  assessors 
and  of  the  local  and  special  commissioners.  There  are  special 
arrangements  for  cities  and  many  other  details  we  may  not 
enter  into.  An  appeal  lies  to  the  general  commissioners,  that 
is,  to  the  local  Commissioners  of  Income  Tax,  but  in  most  cases 
appeal  matters  are  actually  handled  and  settled  by  a  Surveyor 
and  reported  to  the  Commissioners.  Final  appeal  lies  to  the 
Board.  Collectors  appointed  by  the  general  commissioners  re- 
ceive taxes  stopped  at  the  source  and  collect  all  others,  subject, 
however,  to  extensive  supervision  and  control  by  the  central 
Board.  As  stated  above,  much  of  the  tax,  70  per  cent  during 
recent  years,  is  stopped  at  the  source.  This  necessitates  that 
every  taxpayer  who  is  entitled  to  an  abatement  or  a  relief  will, 
and  all  subject  to  the  supertax  must,  file  a  statement  or  return 
of  his  entire  income.  Repayment  of  any  excess  collected  at  the 
source,  in  cash  or  by  allowance  against  the  tax  on  other  income, 
which  is  the  most  common  case,  is  promptly  made.  This 
method  gives  what  the  American  tax  lacks :  (i)  final  and  con- 
clusive assessment  before  the  tax  is  paid ;  (2)  an  easy,  speedy, 
and  inexpensive  appeal  before  local  officers ;  and  (3)  as  complete 
an  audit  as  is  ever  possible. 

Sec.  6.  History  of  Income  Taxes  in  United  States.  —  The  fed- 
eral government  of  the  United  States  made  use  of  an  income  tax 
during  and  for  a  few  years  after  the  Civil  War ;  that  is,  from 
1862  to  1 87 1,  a  period  of  ten  years.  Another  income  tax  law 
was  enacted  in  1894.     But  this  one  was  promptly  held  to  be 


PERSONAL   TAXES:     POLL   AND   INCOME   TAXES      263 

unconstitutional  so  that  the  law  never  took  effect.  Thereafter, 
the  constitution  was  amended,  in  1913,  and  Congress  was  ex- 
pressly empowered  to  levy  an  income  tax.  This  Congress  soon 
did,  and  the  tax  levied  under  the  new  provision  of  the  con- 
stitution became  one  of  the  main  sources  of  war  revenue.  It  is 
still,  1920,  in  force. 

Constitutionality.  —  In  the  United  States  the  question  of  the 
constitutionality  of  an  income  tax  is  of  great  historical  interest, 
not  merely  as  related  to  taxation,  but  as  related  to  greater 
political  and  social  questions.  Incidentally  the  controversy 
throws  light  on  the  distinction,  never  too  clear,  between  a 
direct  and  an  indirect  tax.  For  both  these  reasons  a  brief 
statement  of  the  old  controversy,  although  now  settled,  must 
be  included  here. 

The  constitution  originally  provided  : 

"  Representatives  and  direct  Taxes  shall  be  apportioned  among 
the  several  States  which  may  be  included  within  this  Union,  accord- 
ing to  their  respective  Numbers,  which  shall  be  determined  by  adding 
to  the  whole  Number  of  free  Persons,  including  those  bound  to  Service 
for  a  Term  of  Years,  and  excluding  Indians  not  taxed,  three  fifths  of  all 
other  Persons."     Article  I,  Section  2,  Paragraph  third. 

"  The  Congress  shall  have  Power  To  lay  and  collect  Taxes,  Duties, 
Imposts  and  Excises,  to  pay  the  Debts  and  provide  for  the  common 
Defense  and  general  Welfare  of  the  United  States ;  but  all  Duties, 
Imposts  and  Excises  shall  be  uniform  throughout  the  United  States  ;  " 
Article  I,  Section  8,  Paragraph  first.  (It  should  be  noted  that  the 
word  faxes  is  not  repeated  in  the  uniformity  clause.) 

"  No  Capitation,  or  other  direct,  Tax  shall  be  laid,  unless  in  Pro- 
portion to  the  Census  or  Enumeration  hereinbefore  directed  to  be 
taken,"     Article  I,  Section  9,  Paragraph  fourth. 

Under  these  provisions  it  would  appear  that  in  the  case  of  a 
direct  tax  the  procedure  would  be,  first,  to  fix  the  total  amount 
to  be  raised,  then  divide  that  by  the  total  population  and 
multiply  the  result  b}-  the  population  of  each  state  in  order  to 
arrive  at  the  share  of  each.  These  shares  would  then  be  raised 
in  each  state  on  the  further  basis  of  apportionment  selected  by 
the  state  authorities.  If  tlial  basis  were  polls,  the  matter 
would,  of  course,  be  simple  in  form.     IJut  even  if  that  were  tlie 


264  INTRODUCTION  TO   PUBLIC   FINANCE 

basis,  it  would  obviously  disregard  any  differences  in  ability 
between  the  people  of  different  states,  as  well  as  between  people 
in  the  same  state.  If  any  other  basis,  such  as  property  or 
income,  were  selected  the  differences  between  states  and  the 
consequent  inequalities  would  stand  out  quite  as  clearly.  The 
average  per  capita  wealth  or  income  now  varies  greatly  from 
state  to  state  and  any  per  capita  apportionment  would  neces- 
sarily be  sadly  unequal.  Even  the  technical  omission  of  the 
word  taxes  from  the  uniformity  clause  could  scarcely  be  urged 
as  a  defence  against  such  inequality. 

It  thus  becomes  of  some  importance  to  find  out  what  the 
framers  of  the  constitution  meant  by  the  term  direct  taxes, 
other  than  the  one  they  named,  to  wit,  a  capitation  tax.  His- 
torical research  by  Bullock  and  Seligman  shows  clearly  that 
by  "  other  direct  taxes  "  the  framers  had  in  mind  only  the  sort 
of  taxes,  land  and  building  taxes,  with  which  they  were  familiar, 
and  which  the  Congress  had  undertaken  to  apportion  during 
the  Revolutionary  War.  Among  these  there  was  no  income 
tax.  Moreover,  an  income  tax  was,  in  that  day  and  generation, 
a  novelty,  and  it  would  not  have  been  in  the  least  likely  that  a 
personal  income  tax  would  have  occurred  to  the  minds  of  the 
framers  of  the  constitution  as  even  a  possibility. 

Down  to  1895  the  Supreme  Court  uniformly  held  that  the 
phrase  "  direct  taxes  "  as  used  in  the  constitution  meant  only 
capitation  and  land  and  building  taxes.  When  face  to  face  with 
an  income  tax  the  court  held  that  it  was  not  a  direct  tax  within 
the  meaning  of  the  constitution,  but  fell  among  the  duties, 
imposts,  and  excises  which  must  be  uniform  and  need  not  be 
apportioned. 

The  income  tax  law  of  1S94  was  enacted  for  two  reasons. 
One  was  for  the  purpose  of  meeting  any  deficit  which  might 
arise  from  a  downward  revision  of  the  tariff  made  by  the  Demo- 
cratic party  then  in  power.  The  other  was  to  satisfy  a  mild 
radical  movement  directed  against  the  growth  of  large  fortunes 
and  demanding  heavier  taxation  of  the  rich.  The  forces  of 
conservatism  at  once  arrayed  themselves  against  the  tax  and 
sent  an  army  of  the  most  eminent  attorneys  into  court  to  plead 


PERSONAL   TAXES:    POLL   AND   INCOME   TAXES      265 

the  case  against  the  tax.  From  a  controversy  over  a  fine  techni- 
cal point  of  law,  the  contest  soon  grew  into  a  legal,  political,  and 
social  struggle  of  mass  against  class.  Justice  Field  in  deciding 
the  case  seems  to  ha\'e  recognised  that  it  involved  far  more 
than  the  comparatively  light  tax  before  the  court.  He  said: 
"  The  present  assault  upon  capital  is  but  the  beginning.  It  will 
be  but  the  stepping-stone  to  others  larger  and  more  sweeping 
till  our  political  condition  will  become  a  war  of  ihe  poor  against 
the  rich  ;  a  war  constantly  growing  in  intensity  and  bitterness." 
The  decision  was  that  the  tax  was  unconstitutional.  It  rested 
in  part  on  minor  technicahties  in  the  law  itself,  but  in  the  main 
on  the  ground  that  the  income  tax  is  a  direct  tax,  even  within 
the  meaning  of  the  constitution.  Thus  all  previous  rulings 
were  reversed. 

The  Sixteenth  Amendment.  —  This  decision  intensified  the 
very  movement  which  it  was,  perhaps,  designed  to  check.  It 
failed  signally  to  stem  the  rising  tide  of  radicalism.  So  far  as 
the  income  tax  was  concerned  it  led  to  the  sixteenth  amend- 
ment to  the  federal  constitution,  finally  ratified  February  28, 
1913,  which  reads: 

"  Congress  shall  have  power  to  lay  and  collect  taxes  on  income  from 
whatever  source  derived,  without  apportionment  among  the  several 
states,  and  without  regard  to  any  census  or  enumeration." 

This  amendment  ended  the  controversy  over  the  powers  of 
Congress  with  respect  to  the  income  tax.  It  is  sufficiently  self- 
explanatory,  except  as  to  one  phrase,  which  still  (1920)  requires 
judicial  interpretation.  Does  the  phrase  "  from  whatever 
source  derived  "  merely  remove  a  minor  point  of  difficulty 
raised  in  the  decision  of  the  court  in  the  case  of  the  income  tax 
of  1894,  namely,  that  a-  tax  on  income  derived  from  property  is 
a  tax  on  the  property,  and  hence  a  direct  tax  which  must  be 
apportioned,  or  was  it  inserted  as  a  sweeping  investment  of 
Congress  with  power  to  tax  the  hitherto  exempt  salaries  of 
state  olTicers,  local  officers,  and  school  teachers,  and  the  interest 
on  state  and  local  bonds?  These  items  of  income  have  been 
held  to  be  exempt  from  a  federal  income  tax  on  grounds  origi- 


266  INTRODUCTION  TO   PUBLIC   FINANCE 

nating  in  the  famous  dictum  of  Chief  Justice  Marshall  in 
M'Culloch  vs.  Maryland,  1819,  that  "  the  power  to  tax  is  the 
power  to  destroy,"  and  since  Congress  may  not  destroy  the 
states  it  cannot  tax  any  agencies  or  means  necessary  to  their 
existence,  or  to  the  performance  of  their  reserved  functions. 
So  far  (to  1920)  Congress  has  not  seen  fit  to  impose  the  tax 
on  incomes  of  these  classes  and  the  question  has  not  been  raised 
in  court.  Whatever  we  may  hold  as  to  the  expediency  of 
taxing  interest  on  public  bonds,  it  is  hard  to  believe  that  a 
uniform  income  tax  on  all  persons  including  state  officials 
would  destroy  the  necessary  agencies  of  the  states.  The  dictum 
would  clearly  forbid  a  discriminating  tax  on  such  officials,  but 
would  scarcely  apply  to  a  uniform  one.  Yet,  conversely,  a 
state  income  tax  on  a  federal  salary  does  seem  an  impossibility. 

The  Civil  War  income  tax  and  the  attempted  one  of  1894 
gave  us  many  of  the  ideas  now  to  be  found  in  the  federal  in- 
come tax  law  and  on  that  account,  as  well  as  for  their  own 
interest,  are  worth  study. 

The  First  Civil  War  Income  Tax  Law.  —  The  resort  to  an  in- 
come tax  early  in  the  Civil  War  was  suggested  by  the  obvious 
inequalities  of  a  direct  tax  on  real  estate  but  apportioned  to  the 
states  on  the  basis  of  population.  A  bill  was  passed  in  1861 
providing  for  a  tax  of  3  per  cent  on  the  excess  over  $800  of 
"  the  annual  income  of  every  person  residing  in  the  United 
States."  Income  was  not  specially  defined  but  was  declared 
taxable  whether  "  derived  from  any  kind  of  property  or  from 
any  profession,  trade,  employment,  or  vocation."  It  seems  to 
have  been  thought  of  as  a  tax  in  lieu  of  any  tax  on  personal 
property.  It  was  called  the  "  income  duty,"  and  not  a  tax, 
to  keep  within  the  verbal  requirements  of  the  constitution  as 
it  then  read.  The  duty  imposed  by  this  law  was  never  collected, 
for  before  the  date  set  when  it  should  be  collected  Congress 
reassembled  and  passed  another  income  tax  law  superseding 
the  first.  But  this  law  gave  us  two  ideas.  One  was  the  founda- 
tion of  the  degressive  progression  of  the  rates,  embodied  in  the 
phrase  "  on  the  excess  over,"  and  the  other  that  the  tax  is  on 
all  residents,  whether  citizens  or  not. 


PERSONAL  TAXES:    POLL  AND  INCOME  TAXES      267 

The  Law  of  1862.  —  The  new  bill  was  introduced  in  Congress 
in  1862  with  many  misgivings,  being  regarded  as  objectionable, 
inquisitorial,  and  "  of  all  taxes  least  defensible,"  and  was  adopted 
as  a  necessary  evil.  It  was  attempted  to  mitigate  it  by  making 
it  a  part  of  a  comprehensive  system  of  taxes.  These  included, 
among  others,  taxes  on  corporations,  some  of  them  based  on 
gross  receipts,  others  on  bond  interest  and  dividends.  Salaries 
of  federal  officials  were  taxable  at  3  per  cent  on  the  excess  over 
$600  and  this  tax  was  withheld  at  the  source.  For  other 
persons  the  tax  was  also  3  per  cent  on  the  excess  over  $600. 
Income  was  defined  as  the  "  annual  gains,  profits,  or  income  of 
any  person  residing  in  the  United  States,  whether  derived  from 
any  kind  of  property,  rents,  interest,  dividends,  salaries,  or  from 
any  profession,  trade,  employment,  or  vocation,  carried  on  in 
the  United  States  or  elsewhere,  or  from  any  source  whatever." 
Here  we  find  some  more  of  the  phrases  still  used  in  the  income 
tax  law.  Incomes  exceeding  $10,000  were  taxable  at  5  per  cent 
with  a  deduction  of  $600,  but  without  benefit  of  the  3  per 
cent  rate  up  to  $10,000.  Pro\dsion  was  made  to  avoid  taxing 
as  personal  incomes  receipts  already  taxed  as  income  of  corpora- 
tions or  in  other  special  ways.  While  every  one  was  required 
to  make  a  declaration  the  assessor  or  assistant  assessor  made 
the  assessment.  An  interval  of  sixty  days  was  allowed  for 
making  the  assessment.  These  assessment  provisions  were 
excellent  in  intent.  It  is  unfortunate  that  they  have  not  been 
carried  into  the  present  law.  Unfortunately,  also,  they  were 
better  on  paper  than  in  practice.  They  broke  down,  not  be- 
cause they  were  not  inherently  good,  but  from  the  weakness 
of  the  civil  service  at  the  time.  The  assistant  assessors 
were  underpaid  political  appointees,  with  much  authority 
and  little  skill.  The.  personnel  of  the  corps  was  constantly 
changing,  and  selections  were  made  on  the  basis  of  the  old  spoils 
system. 

One  interesting  feature  of  the  law  was  that,  with  the  intent 
to  equalise  between  the  man  who  lived  in  his  own  home,  or  on 
his  own  farm,  and  tenants,  the  latter  were  allowed  to  deduct 
the  amount  they  paid  in  rent  from  taxable  income.    This  is 


268  INTRODUCTION  TO   PUBLIC   FINANCE 

perhaps  the  only  feasible  way  of  equalising  between  owners 
and  tenants  in  a  country  where  ownership  of  the  home  is  so 
widespread,  tenancy  less  common,  and  the  difficulty  of  valuing 
the  rent  so  great. 

The  Invention  of  the  American  Form  of  Degressive  Rate. — 
In  1864  the  progression  was  intensified.  To  many  this  seemed 
objectionable.  The  principle  of  progression  was  unfamiliar. 
One  legislator  said  of  it :  "It  seems  to  me  it  is  a  strange  thing 
to  punish  men  because  they  are  rich."  After  a  long  debate  and 
the  consideration  of  many  counter  proposals  Congress  adopted 
a  system  of  rates  involving  degression.  The  form  was  the  one 
which  is  still  characteristic  of  the  United  States  income  tax 
and  is  peculiar  to  that  country.  The  new  rates  were  5  per  cent 
on  the  excess  over  $600  up  to  $5000,  7^  per  cent  on  the  excess  over 
$5000  up  to  $10,000,  and  10  per  cent  on  the  excess  over  $10,000. 
It  will  be  observed  that,  since  each  new  rate  applies  only  to 
the  excess  over  the  highest  sum  to  which  the  lower  rate  applies, 
the  effective  rate,  that  is,  the  ratio  to  the  entire  income,  never 
changes  abruptly.' 

This  law  was,  however,  again  amended  before  it  went  into 
effect,  and  the  7^  per  cent  rate  was  cut  out,  the  10  per  cent  rate 
being  applied  on  the  excess  over  $5000.  In  1867  the  pro- 
gressive feature  was  modified  and  a  flat  rate  was  applied  to  the 
excess  over  $1000.  It  is  interesting  that  the  principle  of  pro- 
gression adopted,  but  abandoned,  was  revived  in  the  later  laws. 
It  should  be  noted  in  passing  that  the  increase  in  the  exemption 
was  more  apparent  than  real  as  the  constant  fall  in  the  purchas- 
ing power  of  money  during  the  Civil  War  made  $1000  far  less 
effective  than  the  original  $600. 

Assessment  and  Assessors.  —  While  every  taxpayer  was 
required  to  make  a  written  declaration  there  was  large  de- 
pendence on  assessment  and  some  degree  of  publicity.  In 
his  report  of  1864  the  Commissioner  of  Internal  Revenue 
says :  "  the  assessors  .  .  .  have  become  more  thoroughly  ac- 

•  For  more  details  concerning  this  law  and  the  whole  of  the  Civil  War  income 
tax  see:  Sehgman,  Income  Tax,  pp.  44  ff.;  Kennan,  Income  Taxation,  pp.  237- 
256;  Howe,  Taxation  in  the  United  States  under  the  Internal  Revenue  System, 
Chap.  Ill;  Von  Hock,  Finanzen  der  Vereinigten  Staaten  von  Amerika,  p.  2q6  et  seq 


PERSON.\L  TAXES:    POLL  AND  INCOME  TAXES       269 

quainted  wdth  their  ooligations  under  the  law  than  at  any  prior 
period." 

Yield  of  the  Tax.  —  The  income  tax  of  the  Civil  War  was  slow 
to  bring  in  revenue  at  first,  owing  to  its  novelty  and  the  lack  of 
trained  assessors.  During  the  period  when  patriotic  feeling 
ran  high  its  yield  was  large.  After  that,  evasion  by  false 
declaration  became  prevalent  and  the  revenue  fell  off.  With 
the  general  removal  of  the  war  taxes  in  1870  the  income  tax  was 
repealed,  as  to  incomes  received  after  187 1.  Back  taxes  con- 
tinued to  come  in  for  some  time  thereafter. 

Income  Tax  Law  of  1894.  —  The  income  tax  law  of  1894 
carried  over  the  old  definition  practically  unchanged.  The 
tax  was  to  be  a  very  light  one,  being  only  2  per  cent  on  the 
excess  over  $4000.  It  was  to  be  accompanied  by  a  tax  at  the 
same  rate  on  the  entire  net  profits  of  corporations.  Dividends 
were  not  to  be  taxed  again  as  individual  income.  Profits  from 
real  estate  sold  were  not  to  be  taxable  unless  the  real  estate  had 
been  acquired  within  two  years  prior  to  the  sale  thereof.  This 
is  a  somewhat  novel  method  of  solving  the  problem  of  the  taxa- 
tion of  the  increment  in  property  values.  A  sworn  statement 
was  to  be  required  from  all  persons  whose  income  was  over 
$3500.  All  formal  assessment  was  omitted,  and  there  was  no 
provision  for  an  assessment  roll.  The  administration  was 
placed  in  the  hands  of  the  collectors  of  internal  revenue  and 
their  deputies.  This  consolidation  of  assessment  and  collec- 
tion with  virtually  no  deliberate  assessment  at  all  is  a  very 
vicious  feature  of  the  law  which  has  unfortunately  been  inherited 
by  our  later  laws.  Secrecy  as  to  the  returns  was  to  rule.  As 
the  law  was  never  enforced  it  is  of  interest  only  as  a  carrier- 
over  of  ideas. 

The  Corporation  Tax  of  1909.  —  In  1909,  before  the  sixteenth 
amendment  to  the  constitution  was  ratified,  Congress  adopted  a 
tax  on  the  net  profits  of  corporations.  This  tax  is  often  con- 
sidered as  the  forerunner  of  the  present  income  tax.  It  was 
known  as  a  special  excise  tax  and  as  such  was  upheld  by  the 
Sui)rcme  Court.  It  is  now  closely  correlated  with  the  personal 
income  tax. 


270  INTRODUCTION  TO   PUBLIC   FINANCE 

All  Incomes  Accruing  after  March  i,  1913,  Taxable.  — ^Imme- 
diately upon  the  ratification  of  the  sixteenth  amendment  Con- 
gress began  the  preparation  of  an  income  tax  law.  This  law, 
approved  October  3,  1913,  took  effect  as  to  all  incomes  accruing 
after  March  i,  1913.  This  last-mentioned  date  is  important. 
It  is  assumed  that  no  income  received  prior  to  that  date  is 
taxable.  Property  values  as  of  that  date  are  the  starting  point 
in  reckoning  all  increments  of  value  or  profits  made  from  the 
sale  of  property.  This  date  also  enters  into  the  measurement 
of  capital  for  various  purposes  connected  with  the  excess  profits 
tax,  a  tax  conjoined,  in  a  way,  with  the  income  tax. 

The  Several  Acts.  —  The  law  of  1913  was  in  force  nearly  three 
years  when  it  was  amended  by  the  law  of  September  8,  1916, 
and  a  much  heavier  tax  was  imposed.  The  law  of  191 6  was  in 
turn  amended  October  3,  191 7.  Finally  the  law  was  rewritten 
during  191 8  and  the  resulting  extensive  revision  became  the  law 
approved  late  in  February,  1919.  This  act  is  officially  described 
by  its  own  terms  as  the  Revenue  Law  of  1918.  It  includes 
many  taxes  as  well  as  the  income  tax.  It  would  involve  a 
great  deal  of  repetition  to  outline  each  of  these  laws  in  turn. 
It  will  have  to  suflSce  to  outline  the  more  important  changes  in 
connection  with  each  subject,  following  in  the  main  the  outline 
of  the  present  law.  Reference,  when  not  otherwise  stated, 
is  to  the  law  of  1918  passed  in  1919.^ 

Income  Defined.  —  The  general  definition  of  gross  income 
is  substantially  the  same  as  in  the  Civil  War  income  tax  law. 
But  it  is  somewhat  expanded.     It  reads  as  follows :  Gross  in- 

'  What  follows,  while  a  fairly  complete  statement  of  the  most  important  features 
of  the  law,  is  not  a  "taxpayer's  guide."  It  is  designed  rather  to  support  the  theo- 
retical principles  discussed  above  by  concrete  illustration  of  an  income  tax  at  work. 
It  is  hoped,  if  any  one  consults  it  for  that  purpose,  that  this  outline  together  with  the 
theoretical  analysis  may  make  it  clear  why  the  law  and  the  regulations  require  this, 
and  forbid  that.  Technical  points  have  been  omitted,  and  the  writer  has  ventured 
to  omit  things  he  considers  unimportant  to  students.  There  is  already  an  enormous 
literature  for  those  who  would  delve  deeper.  Montgomery,  Holmes,  Nelson,  Black, 
and  scores  of  others  have  prepared  treatises  on  the  taxpayer's  rights  and  duties. 
The  collectors  will  furnish  free  copies  of  the  law,  and  of  the  regulations,  and  of  the 
excellent  primers  prepared  under  government  direction.  While  these  are  designed 
primarily  for  taxpayers,  it  would  be  hard  to  conceive  any  good  reason  why  they 
may  not  be  obtained  by  students  who  may  become  taxpayers  some  day.  See 
bibliography. 


PERSONAL  TAXES:    POLL  AND  INCOME  TAXES       271 

come  "  includes  gains,  profits/  and  income  derived  from  salaries, 
wages,  or  compensation  for  personal  services  .  .  .^  of  whatever 
kind  and  in  whatever  form  paid,^  or  from  professions,  voca- 
tions, trades,  businesses,  commerce,  or  sales  or  dealings  in 
property,  whether  real  or  personal,  growing  out  of  the  owner- 
ship or  use  of  or  interest  in  such  property,  also  from  interest, 
rent,  dividends,  securities,  or  the  transaction  of  any  business 
carried  on  for  gain  or  profit,  or  gains  or  profits  and  income 
derived  from  any  source  whatever."  It  is  interesting  to  note 
the  rudiments  of  a  grouping  or  classification  of  incomes.  There 
is  a  confused  but  apparent  recognition  of  three  kinds  or  classes : 
(i)  "  salaries,  wages  or  compensation  for  personal  services," 
which  may  be  thought  of  as  regular  contractual  earned  income ; 

(2)  income  from  "  professions  .  .  .  business,  commerce,"  pos- 
sibly thought  of  as  including  personal  earnings  not  regular  nor 
contractual  and  the  profits  of  trading  capital.  With  this  would 
be  classed  profits  from  sales  of  property;  (3)  "  interest,  rent, 
dividends,"  or  funded  income. 

In  excess  of  caution  the  statute  goes  on  to  explain  that  gross 
income  does  not  include  certain  items  some  of  which  probably 
nobody  would  ever  suppose  were  income.  These  items  may  be 
grouped  as  follows :  (i)  capital  or  property  receipts,  such  as  the 
proceeds  of  life  insurance  (including  return  of  premiums), 
inheritances,  and  bequests ;  (2)  interest  on  state  and  local  bonds ; 

(3)  amounts  received  under  accident  or  health  insurance  and 
as  workmen's  compensation  for  injuries  and  disability;  (4)  a 
special  exemption  of  $3500  of  salaries  of  the  military  and  naval 

'  "Gains  and  profits"  appears  to  be  a  phrase  copied  from  the  older  laws.  That 
Congress  has  no  power  to  add  "profits,"  when  not  "income,"  to  the  constitutional 
meaning  of  "income"  was  decided  by  the  Supreme  Court  in  the  so-called  stock- 
dividend  case,  Eisner  vs.  Macomber,  March  8,  icj20. 

2  The  omitted  matter  is  in  parenthesis  and  designates  which  federal  salaries  are 

taxable. 

'  This  phrase  is  new,  self-contradictory,  and  most  disconcerting.  Whether  it 
has  any  special  significance  or  is  merely  bad  English,  time  alone  will  reveal.  In- 
come is  something  coming  in  and  paid  means  going  out.  In  any  event  the  statute 
would  give  way  to  the  constitution,  which  reads  "from  whatever  source  derived." 
The  tax  is  not  on  salaries,  etc.,  "  paid,"  but  on  salaries,  etc.,  received.  Text  writers 
all  interpret  paid  as  equivalent  to  received.  Montgomery,  for  example,  explains 
it  as  meaning  "even  if  received  in  some  other  form  than  cash."  Income  Tax  Pro- 
cedure, 191Q,  p.  210. 


272  INTRODUCTION  TO  PUBLIC   FINANCE 

forces  engaged  in  the  war  of  191 7  ;  (5)  income  of  foreign  govern- 
ments, and  of  domestic  governments  from  public  utilities 
or  "  any  essential  government  functions."  Under  a  long 
standing  court  decision  there  are  also  excluded  the  salaries 
of  state  and  local  ofi&cials.  But  this  is  not  mentioned  in 
the  law. 

In  the  interpretation  of  the  definition  the  department  has 
confined  the  idea  of  income  in  general  to  money  income.  Such 
income  is  taxable  when  realised,  or  in  the  language  of  the  regu- 
lations when  "  reduced  to  possession."  The  fundamental 
thought  may  be  expressed  as  "  realised  money  income."  There 
is  one  important  set  of  exceptions.  Where  compensation  for 
personal  services  is  received  in  part  or  in  whole  in  some  form 
other  than  money,  as  in  board  and  lodging,  in  supplies,  in  the 
use  of  an  automobile,  or  in  commutation  tickets  for  travel  be- 
tween home  and  work,  the  value  of  these  items  is  returnable 
as  income.  Money  is  to  be  taken  in  its  broadest  sense  and 
includes  such  things  as  bonds,  shares  of  stocks,  notes,  and 
similar  items  readily  reducible  to  a  cash  value. 

Gifts  of  capital  assets  are  not  regarded  as  income  in  the  hands 
of  the  recipient.  Similarly  gifts  out  of  income  which  has  al- 
ready been  taxed  even  though  it  may  be  used  by  the  recipient 
as  income  and  spent  as  such  is  not  to  be  included  in  the  income 
of  the  recipient.  The  theory  on  which  this  rests  is  trouble- 
some. It  is  supported  by  the  argument  that  it  is  done  to  avoid 
double  taxation.  If  a  father  supports  an  adult  daughter, 
giving  her  a  specified  allowance  out  of  his  income,  it  is  held 
to  be  sufficient  to  tax  the  father  on  his  entire  income  and  then 
not  proper  to  tax  the  daughter  on  her  allowance.  Yet  clearly 
if  the  income  tax  is  a  personal  tax  the  daughter  should  pay 
and  theoretically  the  father  should  not  be  allowed  to  deduct 
the  allowance  from  his  taxable  income.  The  logic  becomes  a 
little  humorously  mixed  as  well  as  bitter  when  the  divorced 
man  finds  that  he  has  to  pay  the  tax  on  alimony,  and  at  the 
same  time  suffer  a  reduction  of  his  personal  exemption  from 
$2000  to  $1000. 

In  general,  use  or  enjoyment  income  is  excluded.    Thus  one 


PERSON.\L   TAXES:    POLL  AND  INCOME  TAXES       273 

who  owns  the  home  he  lives  in  is  not  required  to  return  its 
annual  value  as  taxable,  despite  the  fact  that  he  who  pays 
rent  for  his  home  may  not  deduct  the  rent  as  an  expense.  So 
too  the  farmer  who  consumes  some  of  the  products  raised  on 
his  farm  need  not  return  them  as  part  of  his  income.  The 
underlying  reason  for  these  particular  rulings  and  provisions 
is  probably  the  difficulty  in  many  cases,  possibly  in  the  great 
majority  of  cases,  of  arriving  fairly  at  the  value  of  such  items. 
There  are  many  parts  of  the  country  where  a  valuation  of  these 
items  would  be  sheer  guess  work. 

Realised  Incomes  and  Realised  Losses.  —  There  are  no  excep- 
tions, other  than  those  incident  to  the  interpretation  of  the 
facts,  to  the  rule  that  the  income,  more  particularly  profits, 
must  be  realised,  that  is  reduced  to  possession,  before  it  is 
taxable.  It  is  taxable  when,  that  is  for  the  year  in  which,  it  is 
realised.  The  same  rule  applies  to  expenses,  losses,  and  bad 
debts  which  are  deductible  when  realised.  The  result  is  a 
general  dictum  that  each  year  must  stand  on  its  own  bottom. 
This  rule  is  harsh.  But  the  harshness  is  being  gradually  modified 
by  increasing  recognition  of  the  fact  that  "  closing  a  transac- 
tion "  may  be  only  a  formal  step  in  a  preceding  continuous 
process.  The  difficulties  are  too  technical  for  an  elementary 
treatise.  One  illustration  will  have  to  suffice.  In  many  parts 
of  the  country  farmers  produce  a  single  speculative  crop, 
such  as  cotton,  wheat,  or  dried  fruits.  To  secure  a  favorable 
market  the  crop  may  have  to  be  carried  over  one  or  more  years 
after  the  year  in  which  it  was  raised.  Originally  under  the 
strict  rule  it  appeared  that  the  expense  of  raising  that  crop 
could  not  be  carried  against  the  receipts  from  that  crop,  but 
were  a  deduction  allowed  only  against  receipts  in  the  year 
in  which  the  crop  was  raised.  Since  the  gross  receipts  in  that 
year  may  have  been  nothing,  or  very  little,  this  ruling  possibly 
made  the  entire  gross  receipts  from  the  sale  of  the  crop  taxable. 
But  this  is  corrected  by  a  recent  ruling  which  permits  the 
farmer  to  carry  the  expenses  against  the  specific  croj)  to  the 
production  of  which  they  contributed.  This  ruling  is  a  fair 
interpretation  of  "  gains  and  profits." 


274  INTRODUCTION  TO  PUBLIC   FINANCE 

Gross  Income  Not  Gross  Receipts.  —  Gross  income,  the  thing 
with  which  the  income  statement  begins,  is  not  gross  receipts. 
This  is  a  distinction  of  more  theoretical  than  practical  import. 
Under  the  definition  gross  income  is  by  law  confined  to  "  gains, 
profits,"  etc.,  hence,  the  cost  of  goods  or  of  property  bought 
for  sale  is  to  be  deducted  before  the  statement  is  begun,  and 
only  the  difference  between  the  cost  and  the  selling  price  is  to 
be  reported.  But  while  this  is  the  law,  it  seems  to  be  necessary 
to  show  how  the  gains  were  arrived  at  and  the  official  forms 
furnished  for  the  reports  of  the  taxpayers  provide  that  in  all 
cases  where  it  is  appropriate  there  shall  be  reported  the  cost 
of  goods  bought,  or  the  cost  of  materials  used,  as  in  manufac- 
tures, and  that  cost  is  taken  from  the  gross  receipts  from  sales 
before  the  computation  required  by  the  law  is  started.  Prac- 
tically it  makes  no  difference  in  the  tax. 

Deductions  from  Gross  Income.  —  To  arrive  at  net  income 
there  are  the  following  deductions  to  be  made  from  gross  in- 
come :  (i)  business  expenses,  wages,  and  rentals ;  (2)  interest 
paid  on  indebtedness,  except  that  incurred  to  purchase  and 
carry  bonds  and  other  property  the  income  from  which  is  not 
taxable;  (3)  taxes,  except  income  taxes  and  excess  or  war 
profits  taxes  (special  assessments  are  not  considered  taxes  for 
this  purpose) ;  (4)  losses,  and  bad  debts  when  realised  and 
written  off;  (5)  exhaustion,  wear  and  tear  and  obsolescence. 
There  are  special  provisions  for  ascertaining  the  depletion  of 
capital  assets  in  the  case  of  mines  and  forests.  Finally  there 
are  special  provisions  for  the  amortisation  of  plants  and  equip- 
ment acquired  or  constructed  for  the  production  of  war  ma- 
terials or  for  war  service,  and  special  allowances  for  a  decline 
in  inventory  values  of  stocks  of  merchandise  on  account  of  the 
fluctuation  of  the  purchasing  power  of  money. 

In  the  successive  laws  and  in  their  interpretation  there  has 
been  a  tendency  toward  increased  liberality  in  the  application 
of  these  deductions.  Thus  originally  the  only  losses  allowed 
as  deductions  were  such  as  were  incurred  in  one's  regular  busi- 
ness. If  a  grocer,  for  example,  speculated  in  mining  stock  on 
the  side  and  made  a  loss  he  could  not  claim  a  deduction  on  that 


PERSONAL  TAXES:    POLL  AND   INCOME  TAXES       275 

account.  Although,  if  he  speculated  in  sugar,  buying  it  at 
eight  cents  a  pound  and  having  to  sell  it  at  six  cents  a  pound 
he  could  deduct  the  loss.  Under  the  present  law  (revenue 
act  of  1 91 8)  all  losses  are  deductible  to  the  extent  that  they 
are  not  covered  by  insurance.  By  regulation  even  insurance 
in  excess  of  the  original  cost  of  the  property  lost  is  not  taxable 
if  the  excess  is  necessary  to  and  is  used  for  the  replacement  of 
the  property  lost.     This  is  a  feature  dependent  on  rising  prices. 

Personal  Expenses.  —  To  guard  against  possible  misunder- 
standings the  law  expressly  explains  that  personal  expenses, 
living  or  family  expenses,  may  not  be  deducted,  nor  any  expenses 
or  expenditures  of  the  nature  of  investment  or  betterments  of 
property.  But  all  taxes  are  deductible  except  the  income 
tax  itself.  This  adds  to  the  discrimination  against  tenants 
and  in  favor  of  owners  of  houses.  For  an  owner  not  only  has 
no  tax  to  pay  on  the  use  value  of  the  home  but  can  deduct  the 
local  taxes  thereon  as  well.  The  deduction  of  personal  taxes 
is  a  mistake.  Some  taxpayers  keep  track  of  the  penny  taxes 
they  pay  on  ice  cream  cones,  soda  water,  movies,  etc. 

Credits.  —  For  purposes  which  will  be  more  fully  ex-plained 
below  in  connection  with  rates  there  is  a  sort  of  distinction 
to  be  made  between  net  income  and  net  taxable  income  for  the 
normal  tax,  but  not  for  the  surtaxes.  Net  taxable  income  in 
this  sense  is  net  income  less  certain  "  credits."  The  amounts 
covered  by  the  credits  are  treated  as  tax  paid,  for  this  limited 
purpose  only.  The  credits  are  :  first,  income  which  is  regarded 
as  having  been  taxed  at  the  source;  second,  the  so-called 
personal  exemptions.  The  first  allowance  now  consists  solely 
of  "  dividends  "  on  the  shares  of  stock  of  those  corporations 
which  are  taxed  on  their  net  earnings,  as  will  be  explained  more 
f ullv  below.  Under  the  earlier  laws  similar  credits  were  estab- 
lished  for  other  items  of  income  the  tax  upon  which  was  col- 
lected by  stoppage  at  the  source,  namely  interest,  certain 
salaries,  rent  payments,  and  other  items.^  The  second  credits 
or  exemptions  have  been  changed  from  time  to  time.  The 
original  so-called  personal  exemption  under  the  law  of  1913 

1  See  law  of  September  8,  icji6. 


276  INTRODUCTION  TO  PUBLIC  FINANCE 

was  of  $3000  for  all  persons,  and  $1000  more  if  the  taxpayer 
were  a  married  person  living  with  the  spouse.  These  personal 
exemptions  continued  down  to  and  including  the  law  of  191 7. 
In  that  year  an  additional  "  war  income  tax  "  was  imposed, 
and  for  computing  that  additional  tax  the  exemption  credits 
were  $1000  for  single  persons  and  $2000  for  married.  In  1916 
there  was  a  further  allowance  made  to  the  head  of  a  family  of 
$200  for  each  dependent.  A  dependent  was  at  that  time  defined 
as  a  child  or  defective  supported  by  the  taxpayer.  In  191 8  the 
credit  for  dependents  was  extended,  being  allowed  to  any  person 
whether  head  of  family  or  not,  and  was  to  be  allowed  on 
account  of  any  dependent  defined  as  a  person  "  receiving  his 
chief  support  from  the  taxpayer,  if  such  person  is  under  eighteen 
years  of  age  or  is  incapable  of  self-support  because  mentally 
or  physically  defective."  In  1918,  too,  the  additional  income 
tax  known  as  the  war  income  tax  was  added  to  or  merged  into 
the  regular  income  tax,  so  that  there  is  now  but  one  tax.  The 
personal  exemptions  were  then  made  the  same  as  for  the  former 
war  income  tax,  namely  $1000  for  single  persons,  $2000  for 
married  persons,  and  $200  for  each  dependent.  None  of  these 
credits  are  allowed  in  computing  the  surtaxes  as  will  be  ex- 
plained under  rates  below. 

The  Rates.  —  The  rates  ^  are  such  as  to  establish  degressive 
progression.  There  are  two  different  kinds  of  rates  applied 
cumulatively  as  the  incomes  increase  in  size.  The  first  is 
the  so-called  normal  tax  or  normal  rate.  This  is  now  in  two 
parts.  That  is,  it  has  been  split  into  two  rates.  One  of  these 
may  be  appropriately  called  the  subnormal  rate. 

Ignoring,  for  brevity  of  statement,  the  complication  result- 
ing from  the  collection  of  part  of  the  tax  at  the  source,  that  is 
on  the  earnings  of  corporations,  the  application  of  the  rates  is 
determined  by  the  size  of  the  net  income.  For  the  normal  tax 
it  is  the  net  income  over  the  personal  exemptions,  for  the  sur- 
taxes it  is  the  net  income  regardless  of  the  personal  exemptions, 
and,  for  that  matter,  of  the  other  credits  as  well.     All  taxpayers, 

^  The  rates  under  the  law  of  igi3  were  so  trivial  that  they  are  not  worth  talking 
about,  so  we  are  forced  to  consider  the  war-rates. 


PERSONAL  TAXES:    POLL  AND  INCOME  TAXES       277 

big  and  little,  clerks  as  well  as  their  millionaire  employers, 
enjoy  the  "  personal  exemption."  The  subnormal  tax  under 
the  law  of  1918  applied  to  the  "  first  $4000  of  net  income  " 
above  the  personal  exemption.^  The  normal  tax  under  the  same 
law  applies  to  all  net  income  above  the  personal  exemption  and 
above  the  $4000,  which  is  subjected  to  the  subnormal  tax  only. 
The  normal  tax  in  1918  was  12  per  cent.  The  revenue  law  of 
191 8  provides  that  the  normal  tax  for  income  received  in  1919 
and  thereafter  shall  be  8  per  cent  and  the  subnormal  4  per  cent. 
The  Surtaxes.  —  The  surtaxes  begin  at  $5000  of  net  income 
without  benefit  of  personal  deduction.  Each  rate  named  in 
the  law  applies  to  a  group  or  grade  of  income  designated  by  the 
upper  and  lower  limits.  Thus  the  first  surtax  is  i  per  cent 
on  the  "  amount  by  which  the  net  income  exceeds  $5000  and 
does  not  exceed  $6000."  That  is,  it  applies  then  to  one  $1000 
of  income  only.  The  second  surtax  is  2  per  cent  on  the  amount 
by  which  the  net  income  exceeds  $6000  and  does  not  exceed 
$8000.  It  applies  to  one  $2000  of  income  only.  For  each 
succeeding  group  or  grade  there  is  an  increased  rate.  As 
stated  above  the  first  grade  or  group  is  one  of  $1000  but  each 
group  or  grade  thereafter  up  to  $100,000  of  net  income  contains 
$2000.  The  rate  increases  i  per  cent  for  each  grade.  It  makes 
it,  perhaps,  a  little  easier  to  remember  some  of  the  rates  if  we 
observe  that  between  $6000  and  $100,000  of  income  there  are 
$94,000  divided  into  forty-seven  grades  of  $2000  each,  and  that 
including  the  i  per  cent  for  the  short  grade  from  $5000  to  $6000, 
the  surtax  rate  for  the  last  $2000  before  we  reach  $100,000  is, 
therefore,  48  per  cent.  After  we  pass  $100,000  the  progression 
is  not  so  regular.  There  are  two  grades  of  $50,000  each  with  an 
increase  in  rate  of  4  per  cent  for  each  grade.  Then  one  grade  of 
$100,000  with  an  increase  in  rate  of  4  per  cent  and  one  of  $200,- 
000  with  an  increase  of  3  per  cent.  This  carries  us  up  to  $500,- 
cxx)  of  income  and  to  a  rate  of  63  per  cent.  Then  64  per  cent  is 
applied  to  all  income  between  $500,000  and  $1,000,000.  Finally 
the  maximum  surtax  rate  of  65  per  cent  is  applied  to  the  excess 
over  $1,000,000. 

>  Non-resident  aliens  do  not  bciient  l)y  the  subnormal  tax. 


278  INTRODUCTION  TO  PUBLIC   FINANCE 

The  effect  of  these  combined  rates  can  best  be  seen  when  we 
reduce  the  total  tax  in  each  grade  to  a  percentage  of  the  whole 
income.  The  rate  approaches  77  per  cent  of  the  entire  income 
as  a  limit.  But  it  never  reaches  that  limit.  For,  no  matter 
how  large  the  income  may  be  there  is  always  the  personal  exemp- 
tion to  be  deducted  and  always  the  benefit  of  the  subnormal 
rate  on  $4000.  Moreover  each  higher  rate  of  the  surtaxes 
always  applies  only  to  incomes  above  and  never  to  that  part 
below  the  lower  limit  of  its  class.  Hence,  even  if  the  income  is 
very  large  indeed,  the  rate  will  be  appreciably  below  77  per 
cent.  For  example,  with  an  income  of  $100,000,000,  allow- 
ing a  personal  exemption  of  $2000  the  total  taxes  would  be  at 
1918  rates:  (i)  the  subnormal  tax,  6  per  cent  on  $4000,  or 
$240 ;  (2)  the  normal  tax  12  per  cent  on  $99,994,000,  or  Si  1,999,- 
280,  and  the  cumulative  surtaxes  which  amount  to  $64,933,510. 
The  grand  total  is  $76,933,030,  which  is  $66,970  less  than  77  per 
cent.  For  an  income  of  $1,000,000  the  grand  total  of  taxes  is 
$703,030,  which  is  quite  a  little  below  64  per  cent  plus  12  per 
cent  or  76  per  cent,  which  a  careless  addition  of  the  rates  might 
lead  one  to  look  for.^ 

To  see  what  these  rates  really  mean  and  to  study  the  pro- 
gression one  computes  for  a  number  of  different  incomes  in 
series  the  ratio  of  tax  to  local  income.  Thus  a  married  man 
with  no  children  having  an  income  of  $10,000  net  pays :  a 
subnormal  tax  of  $240,  normal  tax  $480,  surtaxes,  $10,  $40 
and  $60,  together  $110 ;  grand  total  $830,  or  8.3  per  cent  of  his 
total  net  income.  Other  points  in  the  income  scale  may  be 
computed  in  the  same  way  and  the  results  plotted,  if  desired, 
on  a  curve.  Owing  to  the  continuous  carrying  of  the  exemption, 
and  to  the  fact  that  each  increase  in  the  surtaxes  applies  only 

>  The  computation  of  the  surtax,  which  for  large  sums  is  tedious,  if  not  assisted, 
is  simplified  by  the  use  of  a  table  printed  in  the  official  form  for  the  return,  showing 
the  cumulative  surtax  at  the  end  of  each  grade.  The  taxpayer  takes  from  the 
table  the  total  surtax  up  to  the  grade  next  preceding  that  in  which  his  income  falls, 
and  adds  to  that  the  percentage  called  for  of  the  amount  by  which  his  income  enters 
the  last  grade.  Complicated  as  the  rates  may  seem,  their  application  in  any  one 
case  is  simple  and  taxpayers  will  find  little  use  for  the  tables,  charts  and  ingenious 
formulae  which  enterprising  mathematicians  have  published.  The  real  problem 
is  "What  is  my  income?"      If  a  taxpayer  can  answer  that  question  the  rest  is  easy. 


PERSONAL   TAXES:    POLL  AND   INCOME  TAXES      279 

to  the  "  excess  over  "  what  preceded,  the  change  in  the  curve  is 
never  abrupt.  Theoretically  there  is  an  elbow,  or  bird's  wing 
joint,  in  the  curve  at  each  change  in  the  rate.  But  even  when 
drawn  on  a  very  large  scale  the  change  in  the  direction  of  the 
curve  is  barely  perceptible  except  for  the  first  few  increases. 
The  symmetry  is  spoiled  by  the  sudden  change  from  the  sub- 
normal to  the  normal  rate,  which  is  coincident  as  well  with  the 
incidence  of  the  first  two  surtaxes.  The  accompanying  graph 
shows  the  curve  up  to  $12,000  of  income  at  the  rates  on  1918 
incomes.  From  the  point  where  the  graph  stops  the  curve 
continues  in  very  smooth  degression  toward  but  never  reaching 
77  per  cent.  In  order  to  aid  the  eye  in  catching  the  effect 
of  the  increase  in  rates  the  lines  are  prolonged  to  show  where 
they  would  have  gone  had  a  new  rate  not  been  injected. 


*A  9 


< 

a  7 
a 

b    4 

"    3 

2 

1 


Unitec 

Stat 

js  Tnc 

ome  Tax  o 

t 1918, 

E 

1 

Effective  Rj 

ites  u 

?  to  S12.0(X' 

)  of  Income 

. 

,.--^t 

^e"^^. 

^^A 

p- 

^ 

.s.-:!i 

f^. 

..et* 

^:^ 

ff*'^ 

^^^ 

."^ 

/ 

$2000 


iJOOO 


$6000  $8000 

INCOMES 


$10000 


$12000 


There  is  no  other  income  tax,  unless  it  be  a  copy  of  this  one, 
in  which  the  degression  is  at  once  so  smooth  and  yet  so  sharp. 
The  proposed  reductions  in  the  rate  for  191 9  incomes  are  made 
in  the  normal  and  subnormal  rates  only.  This  means  that  the 
degression  will  be  sharper  still,  because  the  very  large  incomes 
benefit  relatively  less  by  the  reduction  in  these  rates. 

Classes  of  Taxpayers.  —  The  taxpayers  may  be  roughly 
grouped  in  three  classes.  There  are:  first,  citizens,  whether 
resident  or  not,  who  are  theoretically  taxable  on  their  entire 
income  whether  it  be  earned  or  gained  in  the  United  Slates  or 


28o  INTRODUCTION  TO   PUBLIC   FINANCE 

outside.  Then,  second,  there  are  residents  who  may  not  be 
citizens,  who  are  likewise  taxable  on  their  whole  income,  re- 
gardless of  its  source.  Lastly,  third,  there  are  non-resident 
aliens  receiving  income  from  sources  within  the  United  States. 
The  tax  is  therefore  personal  so  far  as  residents  and  citizens 
are  concerned,  non-personal  or  falling  on  income  per  se  as  to 
non-resident  aliens.  This  is  on  the  plan  of  getting  all  that 
can  be  got.  There  are  obvious  inconsistencies  in  mixing  the 
two  ideas  of  a  personal  and  a  non-personal  income  tax,  and  the 
confusion  in  logic  leads  to  many  practical  difficulties.  These 
are  even  more  apparent  in  the  New  York  state  income  tax,  so  a 
discussion  thereof  will  be  postponed  until  we  come  to  that  tax 
below.  It  is  hardly  to  be  hoped  that  non-resident  citizens  will 
report  all  income  not  coming  into  or  earned  in  the  United  States, 
or  that  resident  aliens  will  report  income  that  does  not  come  into 
the  United  States.  Sometimes  it  is  said  that  there  is  another 
classification  of  taxpayers  into  individuals  and  corporations. 
But  this  is  rather  a  classification  relating  to  the  mode  of  report- 
ing and  for  purposes  of  collection,  and  not  one  of  taxpayers  in 
the  sense  of  tax-bearers.  Technically  or  administratively  there 
is  also  a  class  of  taxpayers,  called  fiduciaries,  that  is,  guardians, 
trustees,  executors,  administrators,  receivers,  and  conservators 
who  handle  the  incomes  of  others. 

Another  way  of  classifying  taxpayers  is  suggested  by  the  appli- 
cation of  the  personal  exemptions.  This  gives  us  single  persons, 
some  with  and  some  without  dependents,  heads  of  families,  and 
lastly  husbands  and  wives.  The  law  seems  to  contemplate 
that  married  persons  may  make  a  separate  return  each  and  be 
taxed  separately  if  they  have  separate  incomes,  or  they  may  if 
they  so  elect  make  a  joint  return.  The  regulations  favour  the 
making  of  separate  returns  despite  the  fact  that  it  reduces  the 
revenue.  Since  the  parts  are  necessarily  less  than  the  whole, 
the  likelihood  of  running  into  the  higher  surtax  rates  is  lessened 
by  separate  returns.  If  separate  returns  are  made,  only  one 
credit  of  $2000  for  the  personal  exemption  is  allowed.  The 
two  thousand  dollars  exemption  may  all  be  taken  by  one  alone 
or  may  be  divided  between  husband  and  wife  in  any  proportion 


PERSONAL   T.\XES:    POLL  AND  INCOME  T.\XES        281 

they  may  desire.  It  is,  however,  only  when  the  aggregate 
income  is  above  S5000,  that  is,  when  it  reaches  the  first 
surtax,  that  there  is  any  advantage  to  the  taxpayer  in  separate 
returns. 

The  Returns.  —  The  technical  name  for  the  declaration,  or 
statement  of  income  filed  by  the  taxpayer,  is  the  "  return." 
Returns  are  required  of :  (a)  individuals,  if  their  net  income 
equals  or  exceeds  the  personal  exemption  without  including 
the  exemption  for  dependents,  that  is,  if  the  income  of  a  single 
person  equals  $1000  or  of  a  married  person  $2000,  or  exceeds 
those  amounts ;  (b)  all  corporations,  except  certain  classes  that 
are,  on  account  of  the  nature  of  their  business,  exempt ;  ^  (c) 
partnerships ;  and  (d)  fiduciaries.  The  return  from  partner- 
ship is  required,  not  as  the  basis  of  a  tax  on  the  partnership  as 
such,  but  as  the  means  of  checking  the  returns  of  partners  as 
individuals.  Fiduciaries  make  return  of  the  income  of  persons 
whose  estates  they  control. 

Personal  Service  Corporations.  — The  law  of  1918  makes  an 
ingenious  distinction  as  to  "  personal  service  corporations." 
These  are  defined  as  corporations  whose  income  is  to  be  ascribed 
primarily  to  the  activities  of  the  principal  owners  or  stock- 
holders —  and  in  which  capital  is  not  a  material  income  pro- 
ducing factor.  These  are  treated  for  taxation  substantially  as 
partnerships.  One  may  doubt  whether  this  ingenious  device 
will  stand  scrutiny  in  court. 

1  The  exempt  classes  are:  i.  Labor,  agricultural,  or  horticultural  organisations; 
2.  Mutual  savings  banks  not  having  a  capital  stock  represented  by  shares;  3.  Fra- 
ternal beneficiary  societies,  orders,  or  associations,  (a)  operating  under  the  lodge 
system  or  for  the  benefit  of  members  of  the  fraternity,  and  (6)  providing  for  the  pay- 
ment of  life,  sick,  accident,  or  other  benefits  to  the  members  or  their  dependents; 
4.  Domestic  building  and  loan  associations  and  cooperative  banks  without  capital 
stock,  organised  and  operated  for  mutual  purposes;  5.  Cemetery  companies; 
6.  Religious,  charitable,  scientific,  or  educational  corporations,  and  societies  for 
the  prevention  of  cruelty  to  children  or  animals,  with  limitations;  7.  Business 
leagues,   chambers  of  commerce,   boards  of  trade;    8.    Civic  leagues;    9.  Clubs; 

10.  Farmers',  or  other,  mutual  hail,  cyclone,  or  fire  insurance  companies,  mutual 
ditch  and  irrigation  companies,  mutual  telephone  companies,  and  like  organisations; 

11.  Farmers'  cooperative  selling  associations;  12.  Corporations  organised  for 
the  exclusive  purpose  of  holding  property  and  distributing  the  income ;  13.  Federal 
land  banks  and  national  farm  loan  associations. 

All  exemptions  are  strictly  construed  and  are  subject  to  limitations  omitted 
above,  but  which  can  be  found,  if  desired,  in  tl*e  law. 


282  INTRODUCTION  TO  PUBLIC  FINANCE 

The  Taxation  of  Corporate  Income.  —  As  has  been  stated, 
corporations  were  subjected  to  a  tax  on  net  income  as  early  as 
1909.  With  the  coming  of  the  personal  income  tax  in  1913  and 
with  its  development  in  the  subsequent  income  tax  laws,  this 
tax  has  been  continued,  but  it  is  adjusted  to  and  practically 
incorporated  into  the  income  tax.  Briefly  stated  the  system  is 
that  corporations  make  return  of  their  net  income  and  pay  the 
tax  thereon  at  the  normal  rate,  except  that  for  1919  and  years 
thereafter,  unless  again  revised,  the  rate  is  to  be  10  per  cent, 
although  the  rate  on  individuals  is  for  1919  and  thereafter  set 
at  8  per  cent.  Any  taxpayer  receiving  dividends  from  a  corpo- 
ration takes  his  credit,  as  above  explained,  for  the  dividend  in- 
come as  tax  paid.  But  the  dividends  are  included  in  computing 
the  surtaxes.  The  difference  in  the  rates  between  corporations 
and  individuals  for  1919  and  thereafter  may  be  regarded  as  the 
beginning  of  a  differential  rate  as  between  earned  and  unearned 
incomes,  or,  it  may,  if  one  prefer,  be  regarded  as  a  continuance 
of  the  older  tax  on  corporations,  the  new  income  tax  being 
added  to  the  old  one.  Some  discrimination  resulting  from  the 
separate  taxation  of  corporations  will  be  discussed  below. 

"  Withholding  "  under  Law  of  1916.  —  In  the  law  of  1916 
there  were  a  number  of  provisions  for  the  collection  or  stoppage 
of  the  tax  at  the  source,  called  "  withholding."  The  system 
was,  however,  by  no  means  so  extensive  as  in  the  British  tax. 
Withholding  the  normal  tax  and  remittance  thereof  to  the  gov- 
ernment was  made  the  duty  of  all  who  paid  over  or  transferred 
to  others:  (i)  interest  on  corporation  bonds,  (2)  income  paid 
out  in  a  fiduciary  capacity,  (3)  interest,  and  dividends  coming 
from  abroad,  or  going  to  foreign  parts,  (4)  "  any  fixed  or  deter- 
minable annual  gains,  profits  and  income,  such  as  salaries,  wages, 
interest,  rent,  etc.  .  .  ." 

To  make  such  a  system  acceptable  there  must  be,  as  is  ex- 
plained elsewhere,  an  easily  accessible  and  expeditious  means 
of  promptly  repaying  to  those  entitled  to  a  refund  or  abate- 
ment by  reason  of  small  incomes,  or  otherwise,  all  excess  taxes 
stopped  at  the  source.  No  such  system  was  devised,  or  at  least 
there  was  no  refunding  system  provided  in  which  any  taxpayer 


PERSON.\I.   TAXES:    POLL   AND   INCOME  TAXES        283 

had  confidence.  In  its  place  it  was  arranged  that  any  recipient 
of  the  items  of  income  hsted  above  could  file  with  the  with- 
holder,  or  banking  agent  transferring  such  income,  a  certificate 
to  the  effect  that  he  claimed  exemption.  These  certificates, 
appropriately  printed  on  yellow  paper,  could  then  be  turned 
over  to  the  government  in  lieu  of  withheld  taxes.  These  yellow 
certificates  at  once  became  the  "  yellow  dog  "  of  the  income 
tax.  The  system  was  unpopular,  it  put  banks  and  others  to  a 
considerable  expense,  making  them  unpaid  tax  collectors  to 
their  own  disgust  as  well  as  to  that  of  their  customers. 

Information  at  the  Source.  —  In  the  present  law  (191 8) 
there  is  withholding  at  the  source  only  as  to  income  going  to 
non-resident  aliens.  In  place  of  the  old  system  we  have  "  in- 
formation at  the  source."  This  means  that  every  person 
making  a  payment  to  another  of  "  interest,  rent,  salaries,  wages, 
premiums,  annuities,  compensations,  remunerations,  emolu- 
ments, or  other  fixed  or  determinable  gains,  profits,  and  income 
of  $1000  or  more  "  (formerly  $800)  in  any  year  must  make 
"  return  "  of  such  payment  to  the  government.  This  system 
is  better  than  the  other  in  so  far  as  it  does  not  involve  so  many 
persons,  but  worse  than  the  other  in  its  moral  degradation. 
It  tries  to  make  some  persons  spies  and  tattle-tales  and  for 
that  reason  largely  fails  of  its  purpose. 

Secrecy  of  the  Returns.  —  Secrecy  of  returns  is  a  very  promi- 
nent feature  of  the  tax.  Practically  nobody  but  officials,  under 
bond  and  subject  to  severe  penalties  if  they  reveal  the  content 
of  the  returns,  ever  lays  eyes  on  a  taxpayer's  return.  The  few 
exceptions  made  are  safeguarded  in  every  way.  One  incidental 
and  lamentable  consequence  is  that  no  adequate  statistical 
compilation  of  the  facts  and  figures  in  the  returns  can  be  made, 
or  published,  lest  by  inference  some  one  might  guess  at  some 
one  else's  income  or  some  part  thereof.  In  other  countries 
income  tax  returns  give  invaluable  information  as  to  the  eco- 
nomic well-being  of  different  classes,  which  is  useful  for  many 
purposes.  In  the  United  States  the  facts  are  buried  in  the 
official  reports  in  general  averages  (of  a  sort)  and  in  grand  totals. 

So  strong  is  the  sentiment  for  secrecy  that  it  is  held  to  be 


284  INTRODUCTION  TO   PUBLIC   FINANCE 

impossible  to  create  local  boards  of  review ;  and  an  assessment 
of  any  formal  deliberative  sort  before  collection  is  hampered 
and  made  practically  impossible.  In  place  of  assessment 
checked,  reviewed,  and  formally  recorded  officially  we  have  in 
the  main  self -assessment,  checked  by  inspectors,  and  revenue 
agents  who  proceed  on  the  same  theory  and  by  the  same  methods 
as  do  detectives  of  crime. 

To  a  people  unaccustomed  to  an  income  tax  it  may  seem  that 
one's  income  is  a  very  intimate,  personal,  and  private  affair,  and 
there  is  a  natural  dread  of  letting  one's  business  rivals  know 
one's  business.  But  as  a  matter  of  fact  the  income  tax  state- 
ment or  return  would  be  no  more  likely  to  be  examined  out  of 
sheer  curiosity  or  for  purposes  of  gossip  than  are  the  property 
tax  returns  about  which  no  such  veil  of  secrecy  is  drawn ;  and 
the  business  rival  generally  has  better  information  already  than 
he  could  possibly  obtain  from  the  returns.  Against  such  dark 
secrecy  it  may  well  be  urged  that  it  is  very  important  to  feel 
assured  that  all  incomes,  my  neighbour's  as  well  as  mine,  are 
fairly  and  truly  assessed,  a  thing  that  can  never  be  if  the  final 
assessments  never  see  the  light  of  day.  Fear  of  publicity  is  a 
bogie-man.  This  does  not  mean,  however,  that  publicity  should 
be  used  as  a  means  of  duress,  to  force  assessments  in  excess  of 
what  is  right,  just,  and  equal. 

Scant  Assessment  Procedure.  —  Assessment  procedure  is 
exceedingly  scant.  The  taxpayer  files  his  return  with  the  nearest 
collector.  Since  there  are  none  too  many  of  these,  and  they 
have  offices  only  in  the  large  centres,  this  is  often  done  by  mail. 
The  collector  examines  the  returns.  He  may  "  increase  the 
amount  of  the  return,"  but  there  is  no  provision  of  law  under 
which  he  may  lower  it.  Possibly  if  he  thought  it  too  high  he 
would  return  it  and  allow  the  taxpayer  to  file  a  new  one.  The 
collector  then  sends  the  return  to  Washington  to  the  Com- 
missioner of  Internal  Revenue.  "  As  soon  as  practicable  after 
the  return  is  filed,  the  Commissioner  shall  examine  it,"  says 
the  law.  But  he  has  five  years  in  which  to  make  an  assess- 
ment.^ Meanwhile  the  taxpayer  has  been  required  to  pay  a 
1  Sec.  250  ((i)  Revenue  Law  of  1918.     Regulations  45,  Art.  1012. 


PERSONAL  TAXES:    POLL  AND  INCOME  TAXES        285 

first  instalment  of  one-quarter  and  another  quarter  every  three 
months  thereafter.  By  a  sort  of  statute  of  Hmitations  the 
government's  right  to  assess  lapses  after  five  years,  unless  fraud 
is  alleged.  Until  the  Revenue  Law  of  191 8  came  into  force 
the  tax  was  not  payable  until  ten  days  after  "  notice  and  de- 
mand "  was  served  on  the  basis  of  collectors'  lists  approved 
by  the  Commissioner.  Under  the  present  law  and  regulations 
the  procedure  is  still  more  vague.  The  regulation  says :  "  After 
checking  the  figures  the  Commissioner  assesses  the  tax  on  the 
basis  of  the  collectors'  lists.  The  collectors  then  send  out  bills 
for  the  taxes,  either  as  computed  by  the  taxpayers  or  as  recom- 
puted." But  this  applies  only  when  the  Commissioner  finds 
the  tax  to  be  different  from  that  self -assessed. 

Nowhere  in  the  law  or  in  the  regulations  is  there  provision 
for  a  formal  assessment  roll,  and  the  only  warrant  for  collection 
other  than  the  one  the  taxpayer  makes  out  for  himself  is  the 
bill  for  taxes  mentioned  in  the  passage  above  quoted.  The 
whole  procedure  of  assessment  and  collection  is  lax  and  dis- 
orderly in  the  extreme. 

The  Tax  Year.  —  The  tax  year  is  usually  the  calendar  year, 
and  most  taxpayers  report  income  on  that  basis.  If,  however, 
the  taxpayer  has  a  fiscal  year,  or  year  of  accounting,  different 
from  the  calendar  year  and  closes  his  books,  say,  March  31  or 
June  30  each  year,  the  result  of  this  is  a  set  of  elaborate  pro- 
visions for  computing  the  tax  on  income  returned  for  a  year 
other  than  the  calendar  year  at  the  differing  rates  for  different 
tax  years. 

A  corporation  may  not  lessen  the  taxes  of  its  stockholders 
by  retaining  earnings  in  surplus  of  reserv^e.  If  the  profits  not 
divided  are  not  necessary  to  the  business,  they  are  taxable  as 
income  of  the  stockholders  as  if  they  had  been  divided. 

Defects  in  the  Law.  —  As  was  suggested  above,  the  assess- 
ment procedure  is  very  defective.  It  is  a  well-established 
tradition  in  American  taxation,  based  on  the  soundest  prin- 
ciples of  law  and  practice,  that  a  direct  tax  may  not  be  collected 
save  on  the  basis  of  a  full  and  formal  warrant  embodied  in  a 
carefully  prepared  and  legally  attested  assessment  roll.     Self- 


286  INTRODUCTION  TO  PUBLIC   FINANCE 

assessment  is  not  found  in  any  other  tax,  direct  or  indirect. 
But  even  if  self-assessment  is  to  be  adopted  the  assessments 
should  be  made  final  and  conclusive  before  collection. 

Briefly  stated  the  only  proper  procedure  is :  first,  the  tax- 
payer files  a  return  with  a  local  assessor.  (This  ofi&ce  does 
not  now  exist.  There  is  an  extra-legal  office  of  advisor,  but 
the  advisor  is  not  an  assessor.)  Second,  the  assessor  assesses 
the  income  and  enters  the  assessment  on  an  official  roll.  Third, 
the  roll  is  examined  by  a  local  board  of  review,  and  to  that 
board  the  taxpayer  may  appeal  if  dissatisfied  with  the  assess- 
ment as  made  by  the  assessor.  The  board  should  have  the 
power  to  revise  any  assessment,  on  its  own  initiative  or  on 
appeal.  Its  approval  should  be  necessary  to  the  validity  of 
the  roll.  Such  boards  do  not  exist  at  present.  Appeal  now 
lies  only  to  the  Commissioner  at  Washington  and  except  for 
taxpayers  residing  near  Washington  is  impracticable  and  not 
worth  while  unless  the  amount  of  the  tax  in  dispute  exceeds 
the  cost  of  making  the  appeal,  which  is  always  large.  For 
taxpayers  more  than  two  thousand  miles  away,  the  cost  of  appeal 
may  easily  exceed  $1000.  Fourth,  a  final  appeal  should  lie 
to  some  central  authority,  preferably  divided  into  central 
circuit  and  district  boards,  somewhat  after  the  model  of  the 
federal  court.  Fifth,  the  roll,  duly  corrected  and  approved, 
should  become  upon  a  fixed  date  final  and  conclusive  as  to  the 
taxes  of  the  year  in  question.  On  it  the  proper  auditing  ofiicers 
would  extend  the  taxes,  charging  them  to  the  collector.  The 
roll  should  be  the  sole  warrant  for  collection  and  ultimately  the 
official  record  of  reference  for  taxes  paid  or  still  due. 

Another  defect  in  the  law  results  from  the  collection  of  taxes 
on  corporate  earnings  and  the  method  of  credits  to  recipients  of 
dividends.  A  person  who  receives  dividends  and  whose  income 
from  other  sources  does  not  equal  or  exceed  his  personal  exemp- 
tion loses  the  whole  or  part  of  the  benefit  of  the  personal 
exemption,  which  accrues  to  his  neighbour  who  receives  no 
income  from  dividends.  In  like  manner  the  benefit  of  the 
subnormal  tax  is  withheld  from  dividend  receivers  of  less  than 
$6000  of  other  income.     This  is  a  very  serious  discrimination. 


PERSONAL  TAXES:    POLL  AND  INCOME  TAXES      287 

It  can  be  remedied  only  by  a  system  of  refunds.  A  refunding 
system,  prompt  and  readily  accessible  and  in  which  taxpayers 
have  confidence,  is  badly  needed,  not  only  to  correct  this  but 
other  inequalities  as  well. 

The  rates  of  the  surtaxes  are  extremely  high,  rising  to  a 
point  not  justifiable  on  any  sound  theory  of  progressive  taxa- 
tion, or  of  equal  sacrifice.  They  are  so  high  as  to  restrict 
accumulation  and  to  retard  production.  They  are  strictly  war 
rates  and  if  continued  under  peace  conditions  will  ultimately 
result  in  decreased  revenues.  Unfortunately  this  question  has 
become  one  of  politics. ^ 

A  much  discussed  issue  is  the  heavier  taxation  of  unearned 
incomes.  Possibly  the  higher  rates  on  corporation  net  incomes 
for  1919  and  subsequent  years  than  are  to  be  imposed  on  other 
incomes  is  to  be  regarded  as  looking  in  this  direction.  In 
reaching  any  decision  due  regard  should  be  had  of  the  fact  that 
property  that  is  the  source  of  unearned  income  bears  all  the 
burden  of  state  and  local  taxation. 

Sec.  7.  State  Income  Taxes  in  the  United  States.  —  While 
there  have  been  at  various  times  among  the  American  com- 
monwealths some  taxes  called  income  taxes,  there  were  none 
worthy  of  that  name  before  191 1.  The  older  ones  amounted 
to  little  more  than  a  haK-hearted  attempt  to  include  with  prop- 
erty some  few  items  of  income,  or  to  reach  by  way  of  taxing 
income  some  sources  of  vested  income  which  could  not  very 
well  be  taxed  on  a  property  basis.  As  time  passed  it  became 
more  and  more  apparent  that  intangible  personal  property 
could  not  be  made  tributable  under  the  general  property  tax. 
There  seemed,  however,  to  be  a  distinct  kind  of  taxpaying 
ability,  which  had  been  in  part  aimed  at  by  the  old  personal 
property  tax  and  which  was  not  being  reached. 

In  191 1  Wisconsin  proposed  to  kill  two  birds  with  one  stone: 
(i)  to  reach  in  part  at  least  that  sort  of  taxpaying  ability 
which  an  income  tax  alone  can  reach  ;  and  (2)  ultimately  to  drop 
the  vain  effort  to  get  at  personal  property.  So  an  income  tax 
was  imposed  on  all  incomes,  individual  or  corporate,  earned  in 
'  See  discussion  of  the  limit  of  progression,  p.  97. 


288  INTRODUCTION  TO  PUBLIC  FINANCE 

or  derived  from  sources  within  the  state.  Money  and  credits, 
farm  machinery,  household  furniture,  and  personal  adornments 
were  exempted  from  the  old  property  tax  and  any  tax  paid  on 
personal  property  could  be  deducted  from  the  amount  of  tax 
assessed  on  income.  At  the  same  time  the  administration  of 
the  entire  tax  system  was  centralised  under  the  supervision  of 
the  state  tax  commission,  whose  officers  entered  directly  into 
local  assessment  work.  Owing  largely  to  the  excellence  of  its 
administration  and  frequent  adaptation  of  the  law  to  meet  the 
difficulties  which  arose,  the  new  tax  became  a  marked  success. 
The  tax  was  graduated,  the  rates  rising  from  i  per  cent  on  the 
first  taxable  $1000,  up  to  2  per  cent  for  the  fifth  $1000,  then  by 
■J  per  cent  per  thousand,  up  to  6  per  cent  on  the  excess  over  the 
twelfth  $1000.  The  exemptions  were  $1200  for  husband  and 
wife,  $200  for  dependent  children,  and  $800  for  single  persons. 
Curiously  enough  the  rate  on  corporations  was  also  graduated. 
Individuals  were  not  again  taxable  on  dividends  or  interest 
received  from  corporations.  The  proceeds  were  distributed 
70  per  cent  to  the  local  government  where  the  taxed  income 
had  its  origin,  20  per  cent  to  the  county,  and  10  per  cent  to  the 
state.  The  tax  was  so  successful  that  it  gave  prestige  to  the 
idea  of  a  state  income  tax. 

Since  then  Oklahoma,  Connecticut,  West  Virginia,  Massa- 
chusetts, New  York,  Missouri,  Delaware,  New  Mexico,  and 
North  Dakota,  nine  more  states,  have  entered  the  field  of  in- 
come taxation,  although  some  of  them  only  in  part.  Oklahoma 
gives  high  personal  exemptions  and  seems  to  aim  mainly  at 
income  from  productive  sources  within  the  state,  notably  from 
oil  production.  The  rates  are  progressive  and  the  revenue  is 
used  for  state  purposes.  The  laws  of  Connecticut  and  West 
Virginia  do  not  provide  a  personal  income  tax  but  cover  cor- 
porations only,  and  while  called  income  taxes  are  more  like  taxes 
in  the  corporate  franchises.     Both  are  for  state  purposes. 

The  Massachusetts  law  provides  a  classified  income  tax  per- 
sonal in  character.  It  is  in  lieu  of  the  old  tax  on  intangible 
personal  property  in  so  far  as  the  income  therefrom  is  taxable. 
Income  from  stocks  and  bonds  is  taxed  6  per  cent,  annuities 


PERSONAL  TAXES:    POLL  AND  INCOME  TAXES      289 

and  income  from  trades  and  professions  are  taxed  i^  per  cent, 
while  profits  from  dealings  in  money  or  intangibles  is  taxed 
3  per  cent.  The  exemptions  are  small.  The  administration  is 
centraHsed,  the  receipts,  less  cost,  are  distributed  locally,  with 
a  plan,  to  be  reached  gradually  by  1928,  of  dividing  the  pro- 
ceeds as  the  state  tax  is  apportioned.  Meanwhile  the  distri- 
bution is  a  diminishing  offset  to  the  localities  for  loss  of  the  taxes 
on  intangibles. 

Missouri  has  a  flat  rate  of  i-|  per  cent  on  incomes  defined 
practically  as  are  incomes  under  the  federal  income  tax  law. 
Delaware  has  a  somewhat  similar  tax  of  i  per  cent.  New 
Mexico,  like  Oklahoma,  seeks  to  tax  outsiders  who  make  money 
in  the  state.  North  Dakota,  under  the  leadership  of  the  Non- 
partisan League,  a  somewhat  revolutionary  body,  adopted  an 
income  tax  that  distinguished  between  earned  and  unearned 
incomes,  a  thing  which  as  yet  no  other  income  tax  in  the  United 
States  had  undertaken  to  do,  and  also  included  stoppage  at  the 
source. 

The  New  York  Income  Tax.  —  The  most  general  income 
tax  law  is  that  of  New  York,  which  took  effect  in  1920  on 
incomes  of  1919.  A  franchise  tax  on  corporations  measured 
by  net  income  had  been  imposed  in  191 7.  The  tax  follows 
rather  closely  the  federal  income  tax  law  with  divergences  too 
detailed  for  an  elementary  text,  and  besides,  is  at  present 
writing  (1920)  under  amendment  in  the  legislature.  The  rates 
are  graduated,  being  i  per  cent  on  net  income  not  exceeding 
$10,000,  2  per  cent  from  $10,000  to  $50,000,  and  3  per  cent  over 
$50,000.  This  law  opens  up  in  full  one  of  the  difficulties  which 
state  income  tax  laws  will  have  to  meet  and  solve.  That  is  the 
question  of  interstate  income.  If  this  tax  had  taken  the  form 
of  a  tax  on  residents  based  on  personal  income  from  whatever 
sources  derived,  as  recommended  in  the  National  Tax  Associa- 
tion's model  tax  system,  no  trouble  would  have  arisen.  But 
New  York,  especially  the  city,  is  surrounded  by  states  whose 
residents  work  in  New  York,  do  business  there,  or  derive  income 
from  sources  in  New  York.  Among  these  arc  the  commuters, 
who  go  back  and  forth  daily.     The  New  Yorker  did  not  con- 


290  INTRODUCTION  TO  PUBLIC   FINANCE 

template  with  serenity  paying  a  tax  on  his  income  which  a  non- 
resident working  beside  him  or  doing  business  in  competition 
with  him  did  not  have  to  pay.  So  the  tax  was  extended  to 
cover  income  earned  in  or  derived  from  New  York.  That  this 
was  not  merely  "  grabbing  everything  in  sight  "  but  an  attempt 
at  making  the  tax  equal  as  between  a  New  Yorker  and  a  com- 
muter is  shown  by  a  provision,  appearing  to  mean  that  if  a 
non-resident  has  to  pay  an  income  tax  in  his  own  state  he  shall 
be  allowed  credit  therefor  to  such  an  extent  that  his  total  tax 
shall  equal  what  a  New  Yorker  would  pay  on  like  income.^ 
But  since  none  of  the  neighbouring  states  yet  levy  a  personal 
income  tax  this  provision  is  inoperative.  The  argument  that 
the  tax  on  the  non-resident  is  merely  to  equalise  burden  has, 
however,  its  weakness.  For,  theoretically  at  least,  the  non- 
resident pays,  at  his  residence,  in  some  form,  all  the  taxes  re- 
quired to  support  government  there ;  and  if  the  New  York 
taxes  had  remained  on  the  old  property  basis,  the  New  Yorker 
would  never  have  thought  of  asking  the  non-resident  to  help 
out  in  meeting  the  increase  in  the  property  tax  necessary  to  raise 
the  amount  now  to  be  raised  by  the  income  tax.  The  whole 
thing  shows  a  failure  to  appreciate  that  it  is  the  entire  system 
or  complex  of  taxes  that  must  be  considered  in  determining 
questions  of  justice,  not  merely  one  tax  by  itself. 

1  Failure  of  the  law  to  make  proper  allowance  of  the  personal  exemption  to  a  non- 
resident was  corrected  by  the  federal  court,  which  regarded  that  as  discrimination. 


CHAPTER  X 
WAR   PROFITS   AND   EXCESS   PROFITS   TAXES 

Section  i.  A  New  Tax.  —  So  much  ingenuity  has  been 
expended  in  the  past  by  many  generations  of  tax-gatherers  in 
devising  ways  and  means  for  mulcting  the  taxpayer  that  the 
invention  or  discovery  of  a  new  tax  is  a  natural  cause  for  sur- 
prise. Yet  the  Great  War  has  apparently  given  the  world  a 
new  tax,  the  excess  profits  tax.  During  past  wars  the  sources 
of  revenue  which  the  new  tax  attempts  to  tap  have,  to  be  sure, 
been  drawn  upon.  But  they  have  been  reached  by  means  of 
the  other  forms  of  taxation,  by  some  of  the  taxes  upon  prop- 
erty, upon  income,  and  by  consumption  taxes. 

This  tax  is  new  in  the  sense  that  it  singles  out  a  form  of 
profits  —  war  or  excess  profits  —  never  heretofore  separately 
distinguished  as  a  tax  base ;  and  it  is  new,  also,  as  to  the  social 
justification  upon  which  it  rests.  The  tax  is  levied  on  some- 
thing conceived  of  as  abnormal,  and  in  addition  to  the  fiscal 
justification  ever  present  in  all  taxes,  there  is  a  more  or  less 
distinct  intent  to  give  the  public  a  share  in  the  gains  of  "  profit- 
eering "  as  something  transitory  and  abnormal  as  well  as 
undesirable.  Every  other  tax  is  based  on  something  regarded 
as  normal  and  permanent,  or  at  least  recurrent,  and  even  where 
there  is  a  regulative  intent  the  regulation  is  designed  and 
thought  of  as  permanent  and  not  transitory. 

Analogies  with  Other  Taxes  Partial  Only.  —  While  we  have 
no  desire  to  overstress  the  newness  of  this  tax,  it  is,  perhaps, 
of  interest  to  consider  whether  the  analogies  to  older  taxes 
which  have  been  suggested  will  hold.  It  has  been  suggested 
that  the  excess  profits  tax  is  analogous  to  the  inheritance  tax. 
Inheritance  may  be  regarded  as  something  unexpected  and  of 

291 


292  INTRODUCTION  TO  PUBLIC  FINANCE 

the  nature  of  a  windfall,  but  certainly  not  as  something  abnor- 
mal. So  this  analogy  goes  but  a  little  way.  Again,  it  has  been 
suggested  that  there  is  an  analogy  to  a  special  assessment  for 
benefits  accruing  to  some  individual  by  reason  of  government 
action.  But  war  was  not  declared  for  the  purpose  of  creating 
profiteers  or  their  profits,  and  the  private  benefits  which  occa- 
sion special  assessments  are  not  regarded  as  abnormal,  but  as 
more  or  less  designed.  Again  the  analogy  goes  but  a  little  way. 
Finally,  the  tax  is  sometimes  thought  of  as  analogous  to  "  un- 
earned increment  value  "  taxes.  The  analogy  here  is  closer. 
But  it  is  valid  only  in  so  far  as  "  unearned  "  is  interpreted  to 
mean  undeserved  or  abnormal,  which  is  generally  a  strained 
meaning.  An  increment  in  the  value  of  land  is  a  normal  phe- 
nomenon. The  tax  has  been  called  a  variant  of  the  income  tax. 
But  its  sole  relation  to  the  income  tax  is  that  it  uses  a  form  of 
income  as  its  base.  There  is  otherwise  not  even  a  superficial 
resemblance. 

Sec.  2.  What  are  Normal  Profits?  —  The  base  of  the  tax 
is  the  excess  of  profit  over  an  assumed  normal  profit.  While 
the  social  mind  had  been  prepared  for  the  concept  of  this  new 
tax  base,  by  the  subtle  interpretation  of  unearned,  in  the  term 
"  unearned  increment,"  as  meaning  undeserved,  there  has 
never  been  before  such  a  complete,  widespread,  and  almost 
unquestioning  acceptance  of  the  idea  of  unmerited  profits  as 
is  involved  in  this  tax.  Astronomers  and  biologists  for  a  long 
time  past,  and,  more  lately,  social  statisticians  have  used  for 
scientific  analysis  that  form  of  average  called  the  mode,  but 
that  idea  has  never  been  very  clear  or  distinct  in  the  popular 
mind.  Yet  here  we  have  a  legislatively  expressed  conviction 
supported  by  general  assent  of  the  people  that  there  is  a  modal 
or  normal  profit  to  which  the  business  man  is  fairly  entitled, 
and  that  abnormal  profit  ought  to  be  trimmed  away  as  if  it  were  a 
noxious  growth,  or  at  least  made  wholesome  by  a  public  use. 

As  a  source  of  revenue  in  times  of  peace,  even  in  "  piping 
times  of  peace,"  the  excess  profits  tax  is  a  tax  that  is  difficult 
to  justify  or  defend.  But  as  a  war  tax  it  has  a  few  distinct 
merits.     They  are  merits  of  expediency,  not  of  justice.     It  is 


WAR   PROFITS   AND   EXCESS   PROFITS  TAXES         293 

effective  in  getting  revenue.  It  garners  for  government  some 
of  the  results  of  war  inflation  of  prices. 

Lloyd  George  Justifies  Excess  Profits  Tax.  —  In  his  first  war 
budget  speech  in  November,  1914,  Mr.  Lloyd  George  epito- 
mised war  taxation  in  the  following  remarkable  statement : 
"  During  the  war  and  during  the  period  of  reconstruction  .  .  . 
I  think  we  can  look  forward  to  something  like  four  or  five  years 
when  the  industries  of  this  country  will  have  the  artificial 
stimulus  which  comes  from  these  abnormal  conditions.  .  .  . 
I  want  to  impress  upon  the  Committee  with  all  the  earnestness 
at  my  command,  that  it  is  desirable  that  the  nation,  during 
this  period  of  inflation,  should  raise  as  much  money  out  of  taxa- 
tion as  it  can  be  induced  to  contribute.  It  is  easier  to  raise  taxes 
in  a  period  of  war  and  to  lower  them  in  a  period  of  peace  than  it 
would  be  to  raise  even  lower  taxes  in  a  period  of  peace.  War 
is  the  time  for  sacrifice,  and  that  makes  a  difference.  It  is  a 
time  when  men  know  that  they  are  expected  to  give  up  com- 
forts, possessions,  health,  Hmb,  life  —  all  that  the  State  requires 
in  order  to  carry  it  through  the  hour  of  its  trial.  It  is  a  time 
of  danger,  when  men  part  wiUingly  with  anything  in  order  to 
avert  evils  impending  on  the  country  they  love.  Every  twenty 
millions  raised  annually  by  taxation  during  this  period  means 
four  or  five  millions  taken  off  the  permanent  burdens  there- 
after imposed  on  the  country." 

Evils  of  Inflation.  —  Inflation  is  a  nasty  by-product  of  war,  a 
result  of  war  spending,  and  of  the  errors  of  war  finance.  In- 
flation spreads  its  influence  unevenly  from  class  to  class  and 
from  man  to  man,  enriching  some  and  impoverishing  others. 
It  is  undoubtedly  less  disturbing,  at  a  time  when  the  least 
possible  disturbance  of  industry  is  highly  essential,  to  gather 
some  of  the  needed  extra  revenues  from  those  who  profit  by  the 
irregular  rise  in  prices,  than  it  would  be  to  increase  the  general 
taxes.  Those  who  get  rich  from  war  inflation  can  certainly 
well  afford  to  pay  war  taxes.  To  use  the  phrase  of  the  street, 
"  a  good  way  to  get  money  for  the  government  is  to  take  it 
from  those  who  have  it."  The  defect  of  the  tax  is  that  it  has 
so  little  equality. 


294  INTRODUCTION  TO   PUBLIC   FINANCE 

Sec.  3.  Origin  and  Spread  of  the  Tax.  —  The  war  profits 
tax,  which  soon  evolved  into  the  excess  profits  tax,  was  first 
proposed  in  191 5  in  Denmark  and  Sweden.  It  was  the  large 
and  extraordinary  profits  made  by  traders,  especially  by  ex- 
porters, in  supplying  the  needs  of  Germany  which  attracted 
attention  and  caught  the  ever  greedy  eye  of  the  tax-gatherer. 
These  traders  had  exceptional  opportunities  for  profit,  since 
their  trade  routes  were  intact  while  almost  all  other  trade  routes 
into  Germany  were  cut  off.  Much  of  this  rich  trade  was  in 
foodstuffs  and  it  was  at  first  suggested  that  the  tax  be  called  the 
"  goulash  "  or  stew  tax,  implying  that  it  was  aimed  at  the 
German  stew-pot.  From  here  the  tax  spread  with  incredible 
rapidity  to  all  parts  of  the  world.  Like  the  Spanish  influenza 
it  speedily  infected  all  the  belligerent  countries  on  both  sides  of 
the  fighting  lines  and  also  most  neutral  countries.  Writing  as 
early  as  March,  1917,  J.  C.  Stamp  was  able  to  list  thirteen 
countries  which  had  been  invaded  by  this  tax  {Economic  Journal, 
March,  1917). 

When  first  devised  the  tax  was  aimed  only  at  those  unusual 
or  abnormal  profits  which  were  distinctly  traceable  to  war 
conditions  as  a  cause,  or  to  "  trading  on  the  world's  misery." 
So  its  very  first  victims  were  naturally  the  manufacturers  of 
munitions.  But  other  profits  soared  at  the  same  time  and  the 
line  of  demarcation  between  "  war  profits  "  and  other  unusual 
profits  proved  exceedingly  hard  to  draw.  So  post  hoc  easily 
became  propter  hoc  and  all  profits  were  drawn  into  the  net. 
While  the  war  profits  idea,  and  with  it  the  abnormal  profits 
concept,  stuck  fast,  all  large  profits,  even  though  they  might  be 
quite  normal,  came  under  suspicion.  Although  large  profits 
were  fully  covered  by  the  income  tax  with  its  surtaxes,  excess 
profits  were  often  identified  with  large  profits  or  gains.  Two 
examples  will  show  how  the  idea  ran  away  from  its  own  logic. 
Gold  mining  was  at  first  included,  although  with  a  partial 
return  to  common  sense  it  was  later  excluded.  Now,  gold  has  a 
fixed  price,  which  was  not  changed  by  the  war.  But  all  the 
expenses  of  mining,  the  cost  of  labour  and  of  materials,  went  up. 
By  no  possibility  could  a  gold  mine  make  a  war  profit;  quite  the 


WAR  PROFITS  AND   EXCESS   PROFITS   TAXES         295 

contrary,  all  gold  miners  suffered  inevitably  a  war  loss.  Yet 
a  rich  "  strike  "  was  to  be  considered  an  "  excess  profit." 
Again,  one  of  the  early  American  excess  profits  tax  laws  under- 
took to  cover  indi\aduals,  partnerships,  and  corporations  and 
included  as  taxable  excess  profits  personal  earnings  in  excess  of 
$6000,  much  to  the  surprise  and  indignation  of  many  lawyers 
and  other  professional  men,  many  of  whom  earned  less  rather 
than  more  during  the  war.  By  what  reasoning  $6000  was  hit 
upon  as  "  normal  "  earnings  is  hard  to  see,  the  more  so  as  the 
income  tax  surtaxes  would  have  covered  the  same  "  excess  " 
earnings.  Exceptions  there  were  of  many  industries.  Thus 
agriculture  was  in  many  countries  exempt,  and  in  the  United 
States  the  tax  was  finally  confined  to  corporations. 

So  long  as  the  emphasis  lay  on  war  profits,  as  the  object  of 
the  tax,  normal  profits,  the  base  from  which  the  computation 
starts,  was  identified  with  a  pre-war  profit.  The  comparison 
was  at  first  a  direct  one  in  absolute  figures.  If  a  given  firm  was 
making,  before  the  war,  $100,000  a  year  and  in  a  year  during 
the  war  made  $150,000,  then  $50,000  was  considered  the  war 
profit.  Obviously  this  assumes  that  trade  is  along  old  lines, 
that  there  is  no  new  plant  and  equipment  and  no  change  in 
products.  But  these  assumptions  were  rarely  true  to  life. 
How  should  one  proceed  if  there  were  new  capital  investment? 
The  answer  was,  allow  the  new  capital  the  same  rate  of  return 
as  was  earned  before  the  war  on  the  old  capital,  and  tax  only 
the  excess  over  that  amount.  But  suppose  again  it  were  an 
entirely  new  concern  which  was  not  in  business  before  the  war. 
What  then?  Here  the  answer  was:  allow  an  arbitrary  rate  of 
return  on  capital,  arbitrarily  declaring  that  rate  to  be  the  normal 
profit  rate,  and  tax  all  over  that  as  excess  or  war  profits.  In 
arriving  at  the  arbitrary  rate  to  be  allowed  the  thought  that 
there  is  a  basic  rate,  a  generally  accepted  "  due  return  "  on 
capital,  which  ought  to  be  allowed,  comes  up  at  once.  So  any 
specific  reference  to  pre-war  actualities  fell  away  and  an  a 
priori  normal  rate  came  in.  Different  countries  fixed  difTerent 
rates.  But  even  after  this  due  return  rate  had  been  satisfac- 
torily, if  arbitrarily,  fiixed  differences  in  risk  rose  uj^  to  perplex. 


296  INTRODUCTION  TO  PUBLIC   FINANCE 

A  company  with  rapidly  wasting  assets  cannot  live  on  six, 
seven,  or  eight  per  cent  annual  profits.  Capital  will  not  go  into 
highly  speculative  enterprises  (motion  pictures  is  the  stock 
example)  unless  it  has  a  chance  at  big  profits  to  offset  possible 
big  losses.  Some  flexibility  was  necessary.  America  adopted 
the  idea,  in  part  at  least,  of  the  going  rate  in  like  concerns  or 
like  lines  of  business.  Great  Britain  gave  the  administration 
power  to  allow  additional  rates  for  risk  or  other  peculiar  reasons 
in  selected  exceptional  businesses.  Thus  aircraft  manufacture 
was  allowed  9  per  cent  in  addition  to  the  general  normal  rate, 
which  was  6  per  cent,  making  15  per  cent  the  normal  for  this 
business.  But  more  important  than  this,  the  ideas  of  depre- 
ciation, obsolescence,  and  depletion  of  capital  were  greatly 
extended,  so  that  any  excess  profit  or  return  on  capital  over 
the  rigid  normal  assumed  for  all  capital  which  might  be  assumed 
to  be  due  to  the  special  conditions  of  a  given  industry  were  thus 
eliminated  from  profits  and  treated  as  expenses. 

So  kaleidoscopic  and  rapid  were  the  changes  in  the  forms  of 
these  taxes  in  different  countries  that  an  attempt  to  describe 
them,  save  at  undue  length,  would  be  confusing  in  the  extreme. 
We  can  only  touch  on  some  of  the  main  features  in  the  taxes  of 
Great  Britain  and  of  the  United  States  and  shall  confine  our 
attention  mainly  to  their  final  form,  reached  just  after  the 
armistice. 

Sec.  4.  The  British  Excess  Profits  Duty.  —  The  "  excess 
profits  duty  "  of  Great  Britain  was  fixed  in  191 8  at  80  per  cent 
of  the  amount  by  which  the  profits  of  the  taxable  year  exceeded 
the  "  pre-war  standard  of  profits."  This  "  pre-war  standard" 
had  by  this  time  settled  down  to  mean  one  of  two  things.  It 
was  either  the  average  profit  of  any  two  of  the  last  three  years 
prior  to  the  war,  or  a  statutory  percentage  of  the  capital  at  the 
end  of  the  last  pre-war  year}  The  taxpayer  might  use  which- 
ever basis  was  the  larger.  Obviously  the  larger  the  normal  the 
smaller  the  excess  would  be.     New  capital  and  new  concerns 

1  By  applying  the  statutory  rate  to  the  pre-war  capital,  as  the  normal,  Great 
Britain  preserved  the  idea  of  a  pre-war  profit.  The  American  idea,  as  we  shall  see, 
was  of  a  pre-war  normal  rate  of  profit. 


WAR  PROFITS  AND   EXCESS  PROFITS  TAXES         297 

received  the  statutory  allowance  together  with  3  per  cent  addi- 
tional to  cover  the  general  risk  of  investment  in  a  war  period. 
It  will  be  observed  that  the  pre-war  normal  idea  was  preserved 
as  far  as  possible,  although  of  course  the  arbitrary  fixing  of  the 
statutory  rate  cut  loose  somewhat  from  actual  pre-war  facts. 
The  statutory  rate  was  iLxed  at  6  per  cent  for  companies  and  at 
first  at  7  per  cent,  then  finally  8  per  cent  for  other  forms  of 
organisation.  Mention  has  already  been  made  of  the  special 
allowances  which  the  referees  might  make  for  lines  of  business 
with  peculiar  risk  or  other  conditions.  It  is  obvious  that  the 
determination  of  invested  capital  takes  on  great  significance. 
To  avoid  repetition  this  will  be  discussed  under  the  American 
tax  only.  Although  the  general  rules  of  income  tax  accounting 
prevailed,  "  profits  "  were  by  no  means  identical  with  "  income." 
The  subject  of  this  tax  was  the  proprietors'  trading  profit  only.^ 
Hence  interest,  annuities,  and  all  proceeds  of  investment  are 
excluded  from  the  computation.  It  should  be  noted  that  the 
appHcation  of  the  statutory  rate  being  to  pre-war  capital,  the 
tax  is  essentially  a  war  profits  tax,  whether  the  constructive 
statutory  or  the  actual  pre-war  profits  are  used  as  the  normal. 
One  grave  difficulty  of  clinging  so  tenaciously  to  the  pre-war 
basis  was  that  as  time  passed  and  changes  came,  that  basis 
became  more  and  more  antiquated  and  out  of  proper  compari- 
son with  present  facts. 

Sec.  5.  The  History  of  the  War  and  Excess  Profits  Tax 
Laws.  —  In  the  United  States  the  "  war  profits  and  excess 
profits  tax  "  reached  its  most  highly  developed  form  as  applied 
to  net  income  made  during  the  year  1918.  This  tax  had  a  fore- 
runner in  a  tax  of  12,}  per  cent  on  the  profits  of  manufacturers 
of  munitions  levied  under  the  Act  of  1916.  A  general  war 
profits  tax  was  imposed  by  the  act  of  March,  1917,  to  be  re- 
placed by  the  excess  profits  tax  in  the  act  of  October,  191 7, 
both  reappearing  in  new  and  consolidated  form  in  the  revenue 
law  of  1918.  An  interesting  feature,  fortunately  for  one  year 
only,  has  been  already  referred  to.  That  was  the  extension  of 
the  tax  to  cover  the  excess  of  personal  earnings  not  necessarily 

1  In  this  the  British  tax  was  unlike  the  American  and  was  dislinclly  more  logical. 


298  INTRODUCTION  TO  PUBLIC   FINANCE 

profits  when  over  $6000.  This  part  of  the  tax  of  191 7  caused 
much  discontent  and  was  barely  endured  even  as  a  war  measure. 
Profits  earned  in  1919  and  thereafter  are  taxable  only  under  the 
excess  profits  tax,  the  so-called  war  profits  provisions  coming 
to  an  end  in  January,  1920.  At  the  same  time  the  rates  of  the 
excess  profits  tax  were  reduced. 

The  "  war  profits  and  excess  profits  tax  "  (Act  of  1918)  ap- 
plied only  to  corporations  organised  for  profit. ^  As  its  name 
implies  it  was  a  combination  of  two  taxes  and  was  theoretically 
separable  into  two  parts.  One  was  the  excess  profits  tax  proper, 
the  other  was  the  so-called  war  profits  tax.  The  first  was  theo- 
retically on  the  excess  of  profits  over  pre-war  average  earn- 
ings. The  two  taxes  were  interwoven  and  interlaced.  Un- 
like the  British  these  taxes  were  based  on  net  income  from 
every  source,  as  returned  for  income  tax,  and  not  on  profits 
only. 

The  Tax  as  Enforced.  —  The  two  normals,  which  when  in- 
creased by  an  arbitrary  allowance  of  $3000  for  each  were  called 
"  credits  "  and  were  deducted  from  profits  in  order  to  get  the  taxa- 
ble item,  differed  in  the  following  respects.  The  excess  profits 
normal  was  8  per  cent  of  the  capital  used  in  the  business  for  the 
taxable  year.^  The  tax  fell  on  the  difference  between  the  actual 
profit  and  this  normal  profit  plus  an  arbitrary  allowance  of 
$3000.  The  war  profits  normal  was  the  average  profits  of  the 
three  pre-war  years  191 1,  191 2,  and  1913,  plus  or  minus,  as  the 
case  might  be,  10  per  cent  of  the  increase  or  decrease  in  the  in- 
vested capital  of  the  taxable  year  over  the  average  invested 
capital  of  the  same  three  pre-war  years.  Of  course,  if  there 
were  no  pre-war  business  or  capital,  it  was  10  per  cent  of  the 
capital  used  in  the  taxable  year,  although  to  this  administrative 
exceptions  were  permitted.  To  this  normal  an  arbitrary 
allowance  of  $3000  was  added  to  make  the  technical  pre-war 

'  Gold  mining  was  specifically  exempt.  We  omit  provisions  exempting  very 
small  profits,  those  giving  abatements  to  incomes  under  $30,000,  and  the  special 
provisions  for  profits  on  government  contracts  and  for  railroads  and  other  utilities 
taken  over  by  the  government  during  the  war,  and  some  other  minor  adjustments. 

2  Note  that  unlike  the  British  tax  this  cuts  entirely  loose  from  the  pre-war  con- 
cept ;  we  have  here  a  pure  normal  profit  concept. 


WAR   PROFITS  AND   EXCESS  PROFITS  TAXES         299 

credit  or  deduction.  To  repeat,  the  excess  profits  tax  assumed 
that  an  8  per  cent  return  on  capital  is  normal  under  all  condi- 
tions. The  war  profits  tax  assumed  that  pre-war  actual  earn- 
ings were  normal  and  when  that  was  not  ascertainable  that 
10  per  cent  on  capital  is  a  fair  estimate  in  view  of  the  high  tax 
rate  to  be  applied  to  the  war  profit. 

The  excess  profits  tax  was  graduated  not  by  size  of  the  excess 
but  by  degree  of  excessivity  measured  in  terms  of  rate  of  profits 
to  capital.  Thus  on  that  part  of  the  taxable  excess  which  did 
not  exceed  20  per  cent  of  the  capital  the  rate  was  30  per  cent, 
on  all  over  20  per  cent  of  the  capital  the  rate  was  65  per  cent. 
Up  to  20  per  cent,  then,  the  excess  was  considered  mild,  above 
that  it  became  more  intense.  The  war  profits  tax  was  a  straight 
80  per  cent  of  the  excess  of  net  income  over  the  war  profits 
credit.^ 

But  the  two  taxes  were  not  to  be  levied  on  any  one  company. 
In  effect  only  that  one  was  paid  which  was  the  larger  of  the  two. 
The  interweaving  of  the  two  taxes  was,  however,  preserved.  The 
excess  profits  tax  was  computed  first.  Then  the  war  profits 
tax  was  computed.  If  the  first  exceeded  the  second  it  stood 
as  the  tax  and  the  second  was  dropped  or  forgotten.  But  if 
the  second  exceeded  the  first  the  first  was  not  simply  dropped, 
but  was  considered  as  being  included  in  the  second.  It  seems 
to  have  been  the  purpose  of  this  provision  to  facilitate  the  re- 
peal or  dropping  of  the  war  profits  tax  without  disturbing  those 
parts  of  the  law  relating  to  the  excess  profits  tax.  The  law 
reads  as  though  the  two  were  one  tax  with  three  grades  each 
having  a  different  rate.^ 

'  The  American  war  profits  tax,  although  the  rate  was  nominally  the  same,  was 
heavier  than  the  British  in  so  far  as  it  applied  to  all  net  income  and  not  merely  to 
profits.  It  was  lighter  in  so  far  as  the  10  per  cent  allowance  exceeded  the  British 
6  per  cent  allowance.  In  practice  the  heavy  depreciation  allowed  probably  made  the 
American  tax  the  lighter  one. 

*  At  some  time  in  the  discussions  over  this  tax  and  over  the  income  tax 
some  one  hit  upon  the  term  bracket  —  apparently  taken  from  printers'  brackets 
1  ]  —  to  describe  the  items  entering  into,  and  the  calculations  to  be  made 
in  any  one  distinct  part  of  the  computation  of  the  tax.  The  same  term  is 
used  in  connection  with  the  income  tax  to  describe  parts  of  the  income  reported 
for  a  fiscal  year,  which  parts,  because  the  fiscal  year  did  not  corrcsixmd  with  the 
calendar  year,  were  each  subject  to  a  different  tax  rate.  Once  understood  the 
term  is  useful,  for  abbreviated  expression,  much  as  slang  is  sometimes  useful. 


300  INTRODUCTION  TO   PUBLIC   FINANCE 

Beginning  in  1920  and  applying  to  the  net  income  earned  in 
1 91 9  the  rates  of  the  tax  are  to  be  20  per  cent  for  the  excess  up 
to  20  per  cent  of  the  invested  capital  and  40  per  cent  on  the  rest. 

Finally  it  crept  into  the  law  which  provided  for  igi8  net  income  "a  tax  (the  "war 
profits  and  excess  profits  iax,"  not  taxes)  equal  to  the  sum  of  the  following: 

"First  Bracket 

"30  per  centum  of  the  amoimt  of  the  net  income  in  excess  of  the  excess  profits 
credit  (determined  under  section  312)  and  not  in  excess  of  20  per  centum  of  the 
invested  capital; 

"Second  Bracket 

"65  per  centimi  of  the  amount  of  the  net  income  in  excess  of  20  per  centum  of 
the  invested  capital ; 

"Third  Bracket 

"  The  sum,  if  any,  by  which  80  per  centum  of  the  amount  of  the  net  income  in 
excess  of  the  war  profits  credit  (determined  under  section  311)  exceeds  the  amount  of 
the  tax  computed  under  the  first  and  second  brackets." 

It  will  readily  be  seen  that  if  80  per  cent  of  the  amount  of  net  income  in  excess 
of  the  war  profits  credit  exceeded  the  amount  of  the  tax  computed  under  the  first 
and  second  brackets,  then  whatever  the  80  per  cent  amounted  to  was  the  total  tax. 
For  after  taking  away  from  that  80  per  cent  the  entries  found  in  the  first  two 
brackets,  to  get  the  amount  to  be  entered  in  the  third  bracket,  one  then  adds  all 
three  together  again  to  get  the  total  tax.  What  all  this  sliding  down  hill  and  then 
running  up  again  amounted  to  was  merely  to  bring  clearly  before  the  eye  the  in- 
crease in  the  tax  by  reason  of  the  war  profits  tax,  and  yet  to  preserve  the  fiction 
that  there  was  only  one  tax.  The  fiction  was  useful  only  to  facilitate  the  change 
in  the  succeeding  year,  to  a  single  excess  profits  tax  by  the  simple  expedient  of 
dropping  out  the  third  bracket.  It  is  a  triumph  in  the  art  of  law  writing  worthy 
of  the  high  repute  for  sagacity  attributed  by  tradition  to  the  Philadelphia  lawyer. 

Numerical  Example: 

Data  from  books: 

Pre-war  invested  capital  (average  three  years) $50,000 

Pre-war  net  income 10,000 

Invested  capital  1918 100,000 

Net  income  igi8 40,000 

Computed  items: 

Excess  profits  credit : 

Specific $3,000 

8%  of  $100,000 8,000  11,000 

War  profits  credit: 

Specific $3,000 

Pre-war  net  income 10,000 

10%  of  increase  of  capital 5,000  $18,000 

First  Bracket 

20%  of  1918  capital  is $20,000 

Deduct  excess  profits  credit 11,000 

$  9.000 
(i)  Tax  at  30%       $  2,700 


WAR  PROFITS  AND  EXCESS  PROFITS  T.VXES        301 

Difficulties.  —  Two  great  logical  difficulties  of  economic  and 
legal  interpretation  of  this  tax  at  once  presented  themselves. 
These  in  turn  gave  rise  to  grave  practical  difficulties.  Had  it 
not  been  that  patriotic  fervor  prevented  any  one  from  question- 
ing these  taxes  they  would  doubtless  have  gone  into  court  at 
once  and  have  been  tied  up  in  an  unending  snarl  of  litigation. 
These  two  difficulties  were :  (i)  what  is  invested  capital  and 
how  can  it  be  measured ;  (2)  since  the  assumed  universal 
normal  of  8  per  cent  or  10  per  cent  could  not,  in  the  nature  of 
things,  recognise  equally  normal  departures  in  special  cases 
from  the  arbitrary  general  normal,  what  allowances  for  risk, 
depreciation,  obsolescence,  and  depletion  should  be  made,  if 
any,  to  reach  the  proper  normal  in  the  special  cases?  The 
answers  to  these  questions  made  to  fit  the  peculiar  concept 
of  the  excess  profits  have  unfortunately  been  reflected  in  the 
interpretation  and  administration  of  the  income  tax  with 
results  that  bid  fair  to  be  disastrous  in  that  tax.  The  two 
questions  may  be  considered  together  as  essentially  one. 

The  value  of  invested  capital  necessarily  depends  on  the 
earnings.  This  is  true  of  all  businesses.  But  the  difficulty 
is  best  seen  in  speculative  businesses.  No  matter  how  costly 
a  mine  shaft  and  tunnels  may  have  been  they  are  as  worthless 
as  gopher  holes  if  they  tap  no  ore.     Yet  in  this  excess  profits 

Second  Bracket 

1918  income  exceeded  20%  of  1918  capital  by    .     .      $20,000 

(2)  Tax  at  65%        $13.000 

Total  tax  (i)  and  (2) $15,700 

Third  Bracket 

Total  net  income $40,000 

Deduct  war  profits  credit 18,000 

Basis  of  computation  at  80%  $22,000. 

80%  of  822,000  is $17,600 

Deduct  sum  of  (1)  and  (2) i5.70o 

(3)  Tax  in  third  bracket 1.900 

Total  tax  (i),  (2),  and  (3) $17,600 

Note  the  company  also  paid  an  income  tax  of  12%  on  $40,000  less :  $2000 
specific  allowance  plus  the  above  taxes  credited  of  $17,600,  in  all  $19,700. 

That  is  12%  of  $20,300,  or ^>436 

Total  of  all  taxes $20,036 

Other  numerical  examples  abound  in  the  lext-books  and  other  rcfcrcuces. 


302  INTRODUCTION   TO   PUBLIC   FINANCE 

tax  it  is  required  to  fix  the  value  of  invested  capital  independ- 
ently of  income  or  earnings  because  that  value  is  going  to  be 
used  in  turn  to  compute  the  normal  income.  In  short  one 
has  to  fLx  the  shadow  in  the  absence  of  the  body  which  casts 
the  shadow.  The  thing  cannot  be  done  and  in  trying  to  do  it 
the  government  has  given  an  exhibition  of  how  fast  a  pupp\-  can 
turn  round  when  he's  trying  to  catch  his  own  tail.  The  result 
was  that  invested  capital  came  to  be  defined  in  substance  as 
the  amount  paid  in  by  the  stockholders,  whether  originally 
or  out  of  profits,  in  money  or  in  property.  Obviously  this  is 
approximately  identical  with  the  value  of  the  capital  in  the 
case  of  a  bank  and  of  some  similar  staid  and  steady  enterprises. 
But  in  all  other  cases  it  amounts  to  counting  your  chickens 
before  they  are  hatched.  Who  can  say  what  a  dollar  put  into 
a  street  railway  ten  years  ago  is  worth  to-day  ? 

The  difficulties  became  acute  in  the  case  of  mining  and  oil 
industries.  A  partial  solution  has  been  reached  as  a  working 
basis.  That  solution  was  to  take  where  possible  the  market 
value  of  the  property  as  of  March  ist,  1 913,  as  a  starting  point, 
add  at  cost  subsequent  capital  expenditures,  and  deduct  ordi- 
nary wear  and  tear  on  machinery,  etc.,  and  a  cost  allowance 
estimated  on  the  basis  of  what  the  ore  body  or  sands  contain 
per  ton  of  ore  or  barrel  of  oil  extracted.  Market  value  was, 
of  course,  originally  based  on  future  earnings,  but  since  market 
value  was  a  knowable  fact  prior  to  the  present  time  logic  is 
not  quite  broken  although  badly  strained  by  using  this  method. 
Estimates  of  what  is  under  the  ground  are  sheer  guesses.  The 
whole  subject  is  full  of  trouble. 

It  is  of  course  to  the  interest  of  the  taxpayer  to  get  as  high  a 
valuation  of  invested  capital  as  possible,  for  then  the  deprecia- 
tion and  depletion  allowances  and,  also,  the  normal  profit 
allowances  are  larger.  The  excess  profits  tax  is  so  heavy  that 
the  taxpayers  strain  themselves  to  get  these  items  up.  The 
result  will  be  a  permanent  diminution  of  the  income  tax  which 
might  otherwise  never  have  taken  place. 

The  A-priori  Normal.  —  It  was  remarked  at  the  beginning 
of  our  discussion  of  this  tax  that  astronomers  and  statisticians 


WAR  PROFITS   AND   EXCESS   PROFITS  TAXES         303 

have  developed  a  very  definite  scientific  meaning  for  the  con- 
cept of  the  normal  or  modal  average.  By  the  formal  method 
of  least  squares  and  the  less  rigid  short  cut  application  of  the 
theory  of  probability  a  scientific  mode  or  measure  of  the  normal 
can  be  arrived  at  for  any  set  of  homogeneous  items.  It  should 
be  clear,  however,  that  so  far  as  this  tax  is  concerned  no  scien- 
tific accuracy  of  method  has  been  applied  nor  can  one  well  be 
applied  because  the  data  are  not  homogeneous.  What  has  been 
done  has  been  to  fix  by  statute  what  it  is  believed  ought  to  be 
the  normal.  This  congressional  "  ought  "  and  the  actual  "  is  " 
do  not  agree,  save  in  a  few  instances. 

Sec.  6.  Yield  of  Tax  Depends  on  Inflation.  —  It  has  been 
remarked  above  that  as  a  war  tax  the  excess  profits  tax  is  not 
without  some  merit  because  it  appropriates  some  of  the  profits 
of  inflation.  As  a  matter  of  fact  its  yield  depends  very  largely 
on  inflation,  on  paper  profits  reckoned  in  depreciated  money, 
not  necessarily  corresponding  to  any  real  profits.  This  we  may 
show  most  easily  by  an  illustration. 

Let  us  assume  there  was  a  small  cross-roads  grocery  store, 
incorporated,  doing  business  at  the  same  place  before  and 
during  the  war.  We  will  assume  further  that  it  served  in  all 
years  from  191 1  to  1919  substantially  the  same  old  customers, 
with  the  same  quantity  (physical  quantity)  of  groceries,  from 
the  same  old  shop  with  the  same  old  equipment,  and  all  the 
time  with  the  same  old  clerks.  In  short  what  we  aim  to  assume 
is  that  there  has  been  no  change  save  in  the  prices  of  the  goods 
bought  and  sold.  In  191 8  the  store  pays,  let  us  say,  twice  as 
much  money  for  the  goods  bought  and  sells  at  twice  the  old 
retail  prices,  paying  also  double  the  old  wages  to  its  clerks. 
It  cost,  of  course,  two  dollars  in  191 8  to  stock  a  shelf  which  in 
191 1  could  be  filled  for  one  dollar.  We  will  assume  that  the  en- 
tire stock  turns  over  three  times  each  year  on  a  10  per  cent  profit 
margin  between  cost  and  retail  selling  price.  For  simi)licily 
we  will  assume  that  clerk  hire  and  all  general  expenses  are 
covered  in  merchandise  cost,  so  that  the  10  per  cent  is  net  in- 
come or  profit.  The  concern  does  not  borrow  but  the  additional 
turn-over  capital  (in  dollars)  is  advanced  by  the  stockholders 


304  INTRODUCTION  TO  PUBLIC  FINANCE 

out  of  other  private  resources.  We  will  assume  that  the  prem- 
ises cost  $10,000  and  have  not  been  written  up  because  tangible 
property  is  slow  to  respond  to  inflation,  and  that  the  stock 
of  goods  carried  represented  in  191 1  an  average  investment  of 
$50,000.  By  the  assumption  then  the  profits  before  the  war 
were  $15,000  per  annum.  In  1918  the  stocks  of  goods  repre- 
sent an  average  of  $100,000  and  the  profits  for  the  year  are 
therefore  $30,000.  There  will  be  an  excess  profits  tax  to  pay 
of  $8260,  but  no  war  profits  tax.  We  ignore  the  income  tax 
of  $2368.80. 

Analysing  the  figures  we  have  :  profits  before  the  war,  $15,000 
or  25  per  cent  on  a  capital  of  $60,000 ;  profits  1918,  $30,000  less 
tax  of  $8260  or  $21,740,  which  is  a  little  less  than  19  per  cent 
on  a  capital  of  $110,000.  The  stockholders,  despite  the  fact 
that  they  have  put  $50,000  more  into  the  business,  receive  in 
dividends  (out  of  which  there  is  the  income  tax  to  pay)  only 
$21,740,  which  has  a  purchasing  power  of  only  $10,870  as  com- 
pared with  their  $15,000  before  the  war.  By  our  assumption 
the  stockholders  would  have  been  no  better  off  in  1918  had  they 
kept  the  whole  $30,000  than  they  were  in  1911,  with  dividends 
of  $15,000,  the  changes  being  merely  those  necessary  to  make 
the  figures  correspond  to  the  actual  fall  in  the  purchasing  power 
of  money.  Yet  they  are  assumed  to  be  making  an  "  excess  of 
profits  "  and  are  taxed  accordingly  very  heavily.  It  may  be 
urged  against  this  contention  of  ours  that  the  25  per  cent  profit 
assumed  in  the  example  was  always  too  high,  and  it  is  of  course 
true  that  if  the  standard  profit  basis  assumed  were  reduced  to 
8  per  cent  and  a  little  over  there  would  have  been  no  tax.  But 
that  very  contention  shows  the  nature  of  the  tax.  It  is  a  tax 
on  an  assumed  excessivity,  not  as  so  often  alleged  one  on  profit- 
eering during  the  inflation  period. 

Does  This  Tax  Raise  the  Cost  of  Living?  —  It  is  commonly 
asserted  that  the  tax  increases  the  cost  of  living  and  that  it 
enters  into  prices,  carrying  them  high  enough  to  give  the  trader 
his  old  rate  of  profit  even  after  he  has  paid  the  new  taxes. ^     If 

1  We  may  overlook  the  fact  that  the  tax  was  sprung  as  a  surprise  and  not  enacted 
until  the  books  were  closed  for  the  year. 


WAR  PROFITS   AND   EXCESS   PROFITS  TAXES         305 

this  be  true  our  corner  grocery  company  would  have  had  to  be 
able  to  raise  their  prices,  not  merely  100  per  cent  as  assumed, 
but  enough  more  so  that  after  paying  the  tax  they  would  have 
had  full  $30,000  clear.     Could  they  do  it?     This  is  a  difficult 
question  of  shifting  and  incidence,  the  general  principles  of 
which  are  discussed  in  another  place.     The  specific  answer  here 
turns  largely  on  business  psychology  and  will  depend  a  good 
deal  on  the  nature  of  the  competition  the  business  encountered. 
If  its  immediate  competitors  were  partnerships  or  individuals 
who  did  not  have  this  tax  to  pay  the  situation  would  not  be 
favorable  for  shifting  the  tax.    New  competition  would,  however, 
not  be  likely  to  arise.     Competition  acts  slowly  and  it  is  dis- 
tinctly not  safe  to  assume  that  fear  of  competition  would  enter 
into  the  problem  while  prices  were  so  violently  fluctuating. 
It  would  have  done  the  stockholders  little  or  no  good  to  have 
borrowed  the  additional  capital  needed  even  if  they  could  have 
gotten  it  as  low  as  8  per  cent,  despite  the  fact  that  their  added 
capital  of  $50,000  earned  13  per  cent,  for  the  borrowed  money 
would  not  enter  into  the  "  invested  capital  "  and  the  tax  would 
have  been  much  higher,  enough  so  to  more  than  wipe  out  the 
profit  they  might  otherwise  make  by  use  of  the  borrowed  funds. 
If  the  original  conditions  were  such  as  to  warrant  25  per  cent 
profits  those  conditions  would,  new  competition  being  barred 
by  the  uncertainty  and  stress  of  war  times,  probably  persist. 
Hence  it  seems  highly  probable  that  the  company  would  feel 
forced  to  raise  retail  prices  more  than  in  proportion  to  the  rise 
in  wholesale  prices.     This  it  could  do  in  part  by  raising  the  retail 
price  of  goods  already  in  stock,  whenever  a  rise  in  wholesale 
prices  occurred,  and  in  part  by  increasing  the  margin  of  profit 
used  in  marking  its  goods  up.     If,  as  is  certainly  likely  to  be 
the  case,  the  rapid  rise  in  prices  curtailed  purchases  and  lessened 
the  volume  of  business  in  physical,  not  in  money,  measure  it 
might  be  possible  for  the  company  to  shift  the  tax  in  part  if 
not  wholly  to  the  consumer.     Among  the  store's  customers  there 
would  be  some  living  on  fixed  incomes  who  would  have  to  curtail 
purchases  or  buy  only  lower  grades,  so  the  physical  volume  of 
business  would  naturally  fall  ofi'.     Our  conclusion  must  be. 


3o6  INTRODUCTION  TO  PUBLIC  FINANCE 

therefore,  that  while  the  tax  is  often  a  very  real  burden  on  the 
seller  or  manufacturer  it  also  raises  prices  to  the  consumers,  who 
furthermore  suffer  from  being  obliged  to  get  along  with  less 
or  poorer  supplies.  It  is  important  to  note  that  the  period 
of  inflation  during  which  this  tax  has  been  in  force  is  one  in 
which  the  rate  of  business  mortality,  as  measured  by  the  lia- 
bilities of  concerns  which  failed,  has  been  remarkably  low, 
compared  even  with  prosperous  pre-war  years.  This  can  hardly 
be  explained  on  any  other  ground  than  that  the  heavy  taxes, 
together  with  the  ordinary  wasteful  costs  which  must  be  as- 
sumed to  exist  at  all  times  in  a  fairly  uniform  ratio,  have  both 
been  absorbed  by  rising  prices. 

Inequality  of  the  Tax.  —  One  feature  of  the  tax  often  com- 
mented on  is  its  extreme  inequality.  If  our  corner  grocery 
company  had  promptly  disincorporated  as  early  as  191 7  it 
would  have  saved  the  whole  tax.  A  partnership  in  the  same 
business  and  of  the  same  size  of  business  on  an  opposite  corner 
would  not  pay  this  tax.  If  the  stockholders  had  not  been  in  a 
position  to  put  up  the  additional  capital  but  had  borrowed  it 
the  tax  would  have  jumped  from  $8260  to  $10,160,  or  nearly 
$2000  more.  That  is,  one  of  two  concerns  doing  the  same  busi- 
ness may  pay  more  than  the  other,  the  difference  depending 
solely  on  the  method  of  financing,  which  may  or  may  not 
mean  higher  profits  to  the  stockholders. 

Sec.  7.  Discouragement  of  Business  by  This  Tax.  —  The 
extent  to  which  business  is  discouraged  by  heavy  and  unequal 
taxation  is  often  quite  out  of  proportion  to  the  burden  or  in- 
equality of  the  taxation.  It  is  a  generally  accepted  truism 
that  every  tax  tends  to  discourage  the  occurrence  of  the  phe- 
nomenon on  which  it  falls.  If,  as  in  Mexico  at  one  time,  the 
sale  of  cattle  involved  a  heavy  tax,  cattle  would  not  be  sold  if 
they  could  be  otherwise  used  to  advantage.  This  tendency 
never  wholly  absent  is  reduced  to  a  minimum  when  the  tax  is 
regular  and  is  expected  to  occur  each  year,  and  is  operative  at 
its  maximum  when  the  tax  is  regarded  as  temporary  only.  If  a 
tax  of  100  per  cent  is  imposed  on  all  buildings  constructed  this 
year,  and  it  is  known  that  there  will  be  no  tax  next  year,  most 


WAR   PROFITS   AND   EXCESS   PROFITS   TAXES         307 

new  buildings  would  be  built  next  year.  The  excess  profits  tax 
was  understood  to  be  a  war  tax  and  it  was  confidently  expected 
that  it  would  be  repealed  as  soon  after  the  war  as  possible,  being 
reduced  or  scaled  down  as  fast  as  possible.  This  common 
understanding  was  confirmed  in  the  federal  revenue  act  of  191 8 
by  actually  setting  forth  the  high  rates  for  1919  and  the  lower 
rates  for  1920  and  each  year  thereafter.  This  was  a  most 
egregious  blunder  —  an  attempt  by  one  party  "  to  put  one  over  " 
on  the  party  coming  into  power,  which  instead  "put  one  over  " 
on  the  taxpayers  and  consumers.  No  concealment  of  the 
programme  was  made.  But  no  course  more  calculated  to  dis- 
courage production  could  have  been  devised.  He  who  had 
standing  timber  did  not  cut  enough  to  bring  his  profits  into 
the  excess  class,  even  though  by  such  restraint  he  could  raise 
his  price  on  the  small  amount  cut  far  into  the  profiteering 
scale.  So  it  was  with  him  who  had  coal  or  oil  in  the  ground  or 
land  for  sale.  By  waiting  a  year  an  oil  company  could  reduce  its 
tax  on  the  oil  by  a  very  considerable  amount,  more  than  enough 
to  carry  the  oil  in  the  ground.  He  who  had  leather  for  sale 
thought  he  might  well  leave  it  in  the  warehouse  another  year 
until  taxes  came  down.  So  it  was  with  every  industry  where 
postponement  was  possible.  Only  where  production  processes 
could  be  stopped  only  at  a  loss  greater  than  the  taxes,  or  where 
the  profits  would  not  run  into  the  taxable  excess  class,  or  where 
it  was  feared  prices  might  fall  and  the  profits  be  forever  lost, 
or  where  the  consumer  could  clearly  be  made  to  bear  the  whole 
tax,  did  production  continue,  and  in  still  less  cases  did  it  make 
its  normal  expansion.  This  was  disastrous  from  the  point  of 
view  of  general  social  welfare.  The  great  post-war  need  was 
rapid  restoration  of  production,  and  a  rapid  increase  therein 
too. 

A  lumber  company  reasoned  this  way.  If  we  stop  cutting 
there  is  some  loss,  possibly  offset  in  part  by  new  growth ;  but 
if  we  cut  this  year  a  large  part  of  our  profits  ranging  up  to  a 
maximum  of  75  per  cent  will  go  for  taxes;  if  we  wait  a  year 
the  cumulative  demand  will  hold  prices  up,  and  next  year  the 
taxes  will  be  at  least  one-third  less  ;  if  we  wait  two  years  perhaps 


3o8  INTRODUCTION  TO  PUBLIC   FINANCE 

there  will  be  no  taxes.  The  company  then  makes  a  computa- 
tion as  to  just  how  much  it  can  cut  and  sell  to  best  advantage 
this  year  and  next  year  in  view  of  the  tax.  It  is  a  foregone 
conclusion  that  the  amount  will  be  much  less  than  the  tempt- 
ing prices  would  otherwise  have  brought  forth.  If  it  decides 
to  cut  enough  to  run  into  the  excess  profits  it  will  be  sure  first 
that  it  will  get  a  price  large  enough  to  cover  the  tax  in  its  entirety. 
This  explains  how  and  why  it  is  that  the  excess  profits  tax  re- 
strains production,  enhances  the  high  cost  of  living,  and  in 
general  hampers  industrial  reconstruction.  The  interesting 
feature  is  that  it  is  continuance  of  the  tax  in  face  of  the  antici- 
pated removal  of  the  tax  quite  as  much  as  the  high  rate  of  the 
tax  which  causes  this  discouragement  of  industry. 

This  brings  us  to  another  interesting  consideration.  The  tax 
has  been  extolled  as  giving  the  government  a  share  in  the 
plunder  of  the  profiteers  and  thus  restoring  to  the  people  some 
of  that  which  they  had  lost.  In  so  far  as  the  tax  was  unexpected 
and  retroactive,  being  suddenly  imposed,  say  in  191 7,  on  the 
profits  of  1916,  this  result  is  achieved.  But  after  that  as  we  have 
seen  it  can  be  largely  shifted  or  evaded.  Moreover,  as  it  falls 
only  on  profits  that  are  at  once  large  as  well  as  excessive,  it 
misses  a  very  considerable  amount  of  profiteering.  There 
may  be  relatively  very  excessive  profits  on  a  small  output, 
capital  charges  running  over  to  later  years'  production,  say 
of  oil,  and  yet  no  tax  will  be  paid  unless  the  body  of  pro- 
duction be  large  enough  to  carry  into  the  technical  excess  of 
the  tax  law. 

Tax  Condemned  by  Secretary  of  Treasury.  —  The  Secretary 
of  the  Treasury,  the  Hon.  Carter  Glass,  reporting  to  Congress 
in  December,  1919,  said:  "  .  .  .  .  The  Treasury's  objections 
to  the  excess  profits  tax  even  as  a  war  expedient  (in  contradis- 
tinction to  a  war  profits  tax)  have  been  repeatedly  voiced  before 
the  Committees  of  the  Congress.  Still  more  objectionable  is 
the  operation  of  the  excess  profits  tax  in  peace  times.  It  en- 
courages wasteful  expenditure,  puts  a  premium  on  over-capi- 
talization and  a  penalty  on  brains,  energy  and  enterprise, 
discourages  new  ventures,  and  confirms  old  ventures  in  their 


WAR  PROFITS  AND   EXCESS  PROFITS   TAXES  309 

monopolies.  In  many  instances  it  acts  as  a  consumption  tax, 
is  added  to  the  cost  of  production  upon  which  profits  are  figured 
in  determining  prices  and  has  been,  and  will,  so  long  as  it  is 
maintained  upon  the  statute  books,  continue  to  be,  a  material 
factor  in  the  increased  cost  of  living." 


CHAPTER  XI 
THE  INCIDENCE  AND   EFFECTS   OF   TAXATION 

Section  i.  Definitions. — The  most  difficult  problems  in 
taxation  come  under  the  heading  of  this  chapter.  Many  of 
them  are  too  intricate  for  an  elementary  treatise,  so  little  more 
will  be  attempted  than  to  state  the  nature  of  the  problems 
and  to  suggest  a  mode  of  approach. 

We  begin  with  definitions.  An  endeavour  will  be  made  to 
confine  the  term  shifting  to  the  transference  of  the  tax  from  the 
person  who  first  pays  it  to  some  other  person  who  reimburses 
the  first  payer,  or  to  its  passage  from  one  to  another  in  a  series 
of  persons.  In  like  manner  we  shall  try  to  confine  the  term 
incidence  or  final  incidence  to  the  coming  home  of  the  tax  to  its 
final  resting  place  with  some  person  who  cannot  shift  it  any 
further.  So  far  as  it  is  possible  to  do  so,  both  terms  will  be 
confined  to  the  shifting  of  the  burden  of  the  tax  actually  col- 
lected by  the  government.  The  problem  involved  is:  out  of 
whose  pocket  did  the  money  come  which  went  into  the  public 
treasury;  or,  conversely,  in  whose  pocket  would  that  money 
have  remained  if  it  had  not  been  taken  by  the  government? 

These  terms,  shifting  and  incidence,  are  often  used  much 
more  broadly.  For  there  are  burdensome  effects  of  the  imposi- 
tion of  a  tax  which  are  almost  inseparable  in  thought  from  the 
incidence  of  the  tax  per  se.  Thus  a  tax  on  liquor  dealers  may 
be  so  high  that  prices  must  be  raised,  custom  falls  off,  and  bar- 
tenders are  discharged  or  their  wages  are  reduced.  Passing 
over  for  the  moment  the  question  whether  the  taxes  actually 
paid  come  out  of  the  pockets  of  the  dealers  or  out  of  those  of 
their  customers,  can  we  say  that  any  of  it  came  out  of  the  wages 
of  the  bartenders?     If  we  do  so  say,  what  would  be  our  con- 

310 


THE  INCIDENCE  AND   EFFECTS   OF  TAXATION      311 

elusion  if  the  tax  were  so  high  as  to  kill  the  trade  ?  Bartenders 
would  receive  no  wages  and  yet  could  not  be  said  to  bear  any 
tax  for  no  tax  was  paid.  A  very  severe  burden  has  fallen  on 
dealers,  customers,  and  employees,  yet  no  tax  is  paid.  Wher- 
ever it  is  possible  we  shall  refer  to  such  incidental  burdens  as 
these  as  effects  of  the  tax  and  regard  them  as  something  more  or 
less  separable  from  the  questions  of  shifting  and  incidence. 
We  may  not  succeed  in  this  any  better  than  have  many  other 
writers  who  have  attacked  the  same  problem.  The  difficulty 
is  that  the  effects  mingle  with  the  incidence  and  the  incidence 
with  the  effects.  Every  tax  has  a  repressive  effect,  separable 
in  thought  but  not  always  in  computation  from  the  money 
burden  it  involves. 

We  may  use  a  simple  illustration  to  convey  the  three  ideas : 
shifting,  incidence,  and  effects.  An  American  bookseller,  in  a 
college  town,  imports  some  books  from  England,  subject  to  a 
customs  duty,  and  sells  them  to  the  college  students.  He  pays 
the  duty  at  the  custom  house.  But  he  adds  it  to  the  price  he 
charges  the  students.  That  is,  he  shifts  the  tax.  The  students 
who  buy  the  books  clearly  cannot  avoid  the  tax.  So  we  may 
say  that  the  final  incidence  is  on  them.  But,  by  reason  of  the 
tax,  fewer  books  are  bought.  The  publishers'  profits  are  less,  so 
are  the  booksellers'  profits,  and,  there  being  just  that  much  less 
demand  for  printers  and  booksellers'  clerks,  their  wages  are 
depressed.  Moreover  some  students  are  unable  to  buy  the  books 
who  might  have  done  so  had  there  been  no  tax.  These  are  all 
effects  of  the  tax  which  do  not  add  to  the  revenues  of  the 
government,  and  are  not  traceable  in  the  money  collected. 
If  the  tax  is  high  these  effects  may  be  more  serious  than  the  tax 
revenue  warrants. 

Sec.  2.  Some  Taxes  are  Intended  to  be  Shifted.  —  Many 
taxes  are  levied  on  persons  who  are  expected  to  shift  them. 
This  is  almost  universally  true  of  the  indirect  taxes.  It  is  the 
deliberate  intent  of  the  legislature  that  they  shall  be  shifted. 
It  is  the  convenience  of  collecting  from  ihc  few,  that  is,  from 
the  importers,  dealers,  or  the  manufacturers,  rather  than  from 
the  many  scattered  consumers,  which  determines  the  procedure. 


312  INTRODUCTION  TO  PUBLIC  FINANCE 

These  taxes  present  no  special  diflSculties.  It  should  be 
observed,  however,  that  a  tax  is,  as  it  were,  a  sticky  substance, 
and  like  pitch  or  shoemaker's  wax,  some  of  it  may  adhere  to 
every  hand  or  thread  that  touches  it.  Thus  it  is  clear  that  an 
importer  can  succeed  in  shifting  the  customs  duties  which  he 
pays  only  if  he  sells  the  taxed  goods  to  advantage.  He  may 
obviously  be  left  with  some  tax-paid  goods  unsold,  or  be  obliged 
to  sell  them  at  a  sacrifice.  He  uses  every  endeavour  to  avoid 
this,  but  occasionally  it  does  happen. 

Some  Taxes  are  Expected  to  Stay  "Where  First  Imposed.  — 
In  sharp  contrast  to  the  indirect  taxes  stand  a  number  of  direct 
taxes  which  are  commonly  thought  of  as  non-shif table.  The 
legislature  aims  the  tax  at  some  person  who  is  expected  to  be 
both  payer  and  bearer.  We  may  choose  as  an  example  a  poll 
tax.  It  is  generally  considered  as  non-shiftable.  But  are 
there  no  circumstances  under  which  a  poll  tax  can  be  shifted? 
Perhaps  there  are  some.  Let  us  first  suppose  that  the  poll  tax 
is  not  universal,  but  is  aimed  at  a  single  class  or  confined  to  one 
district.  There  have  been  poll  taxes  aimed  at  "  foreign  miners  " 
and  there  have  been  others,  like  a  county  road  poll  tax,  imposed 
in  a  single  district.  In  the  first  case  the  employer  may  have  to 
assume  the  tax  or,  what  is  the  same  thing,  pay  that  much  more 
in  wages  if  he  wants  to  employ  foreign  miners.  In  the  second 
case  workers  will  not  go  into  the  county  and  be  taxed  unless 
they  can  get  wages  enough  higher  than  they  would  get  outside 
to  cover  the  poll  tax.  A  possibility,  at  least,  of  shifting  seems 
then  to  exist.  But,  of  course,  the  industries  involved  may  not 
be  so  prosperous  as  to  stand  the  added  cost,  especially  if  the  tax 
is  very  high.  In  that  case  we  may  have  serious  effects,  but  no 
shifting  because  no  tax  is  paid. 

But  what  if  the  poll  tax  is  universal,  payable  ever^^-here  and 
by  everybody?  Assume  for  a  moment  that  most  of  the  people 
are  workers  who  earn  only  a  bare  subsistence  in  wages.  If  the 
employers  do  not  assume  the  taxes  the  workers  cannot  live,  so 
it  is  argued.  But  the  employers  will  not  be  able  to  pay  the  taxes 
unless  the  market  price  of  the  products  will  cover  them,  which  in 
turn  may  mean  restriction  of  output  and  lower  wages.     We  may 


THE  INCIDENCE  AND   EFFECTS   OF  TAXATION      313 

not  thus  lightly  assume  that  the  tax  is  shifted  to  the  consumer. 
Then,  too,  the  workers  are  consumers  and  it  would  help  them 
not  at  all  if  they  shifted  the  tax  on  to  one  another.  This  line 
of  reasoning  leads  us,  we  find,  into  a  vague  theory  of  diffusion, 
and  weird  confusion  of  thought.  The  trouble  probably  lies  in 
the  fact  that  a  false  assumption  was  made  in  the  hypothesis  that 
the  workers  themselves  cannot  carry  the  burden.  This  is  an 
assumption  never  wholly  true  of  all  the  workers  and  seldom 
true  of  any  large  group  of  them.  Some  of  the  Spanish  rulers  in 
the  Philippines  had  a  cynical  theory  that  it  was  good  for  the 
Indians  {i.e.  the  natives)  to  be  compelled  to  pay  taxes.  For, 
so  the  theon,'  ran,  if  they  did  not  have  to  pay  taxes  they  would 
not  work,  and  if  they  had  to  pay  taxes  under  penalty  of  con- 
finement they  would  work  at  least  long  enough  to  earn  the 
money  to  pay  the  taxes  with,  which  was  better  than  being  idle 
all  the  time.  This  may  seem  a  harsh  doctrine.  But  perhaps 
it  points  to  a  trait  in  human  nature.  The  fact  probably  is  that 
a  universal  poll  tax  is  not  shifted  nor  diffused.  The  men  who 
pay  it  work  more  or  work  harder  than  they  would  if  not  taxed 
and  so  earn  or  produce  enough  to  live  on  and  to  pay  the  tax  as 
well.  The  same  is  probably  true  of  all  taxation  to  a  far  larger 
extent  than  is  realised. 

This  refutation  of  the  diffusion  theory  does  not  seem  com- 
plete by  itself.  But  the  position  that  a  general  direct  tax 
cannot  be  diflfused  is  strengthened  if  the  use  made  of  the  taxes 
by  the  government  is  beneficial  and  promotes  production. 
Good  roads,  for  example,  may  increase  production  by  more  than 
enough  to  pay  these  costs.  Good  schools  may  make  labour 
more  productive  and  so  may  other  activities  of  government. 
May  it  not  be  that  good  government  creates  the  sources  of  its 
own  revenues  in  a  very  real  sense  ? 

The  foregoing  illustration  seems  to  suggest  that  a  universal  tax 
is  not  shiftable,  while  a  limited  or  restricted  one  may  be  shifted. 

Sec.  3.  Taxes  on  Rent,  Interest,  and  Wages.  —  There  was  a 
time  when  the  shares  in  distribution,  rent,  interest,  profits,  and 
wages  seemed  to  be  so  intimately  and  directly  dependent  on 
the  agents  or  factors  in  production,  land,  capital,  and  labour, 


314  INTRODUCTION  TO   PUBLIC   FINANCE 

that  a  tax  on  land  was  thought  of  as  necessarily  a  tax  on  rent, 
a  tax  on  capital  or  business  as  a  tax  on  profit,  and  a  tax  on 
labour  as  a  tax  on  wages.  So  it  became  the  custom  to  discuss 
the  incidence  of  taxation  under  the  captions :  taxes  on  rent 
(or  land),  taxes  on  profits  (or  capital),  and  taxes  on  wages  (or 
labourers).  The  practice  was  never  wholly  successful  because 
no  actual  taxes  among  the  many  levied  were  specifically  aimed 
exclusively  at  any  one  share  or  source.  An  exception  was 
perhaps  to  be  found  in  some  of  the  old  land  taxes.  But  in 
modern  times  it  is  certainly  not  safe  to  assume  that  any  of  the 
prevailing  taxes  can  be  traced  even  in  the  first  instance  exclu- 
sively to  any  one  share  in  distribution  or  to  any  one  source. 

Taxes  as  They  Are.  —  It  seems  far  more  practical  to  study 
the  incidence  of :  (a)  taxes  on  property,  (b)  taxes  on  persons  and 
income,  (c)  taxes  on  production,  and  (d)  taxes  on  consumption. 
The  advantages  of  this  are  that  we  shall  be  deahng  with  actual 
taxes,  and  not  trying  to  subdivide  them  artificially. 

Sec.  4.  Incidence  of  a  Permanent  Tax  on  Property.  —  A 
permanent  tax  on  property  is  equivalent  to  an  appropriation 
by  the  government  of  a  part  of  the  income  of  the  property. 
In  the  chapter  on  the  income  tax  we  discussed  the  relation  be- 
tween income  on  the  one  hand  and  property  value  on  the  other. 
It  was  there  shown  that  the  vahie  of  any  piece  of  property  de- 
pends upon  the  income.  It  follows  then  that  the  appropria- 
tion by  the  government  of  a  part  of  the  income  will  lessen 
proportionately  the  capital  value  of  the  property  to  the  owner, 
provided  all  other  things  remain  equal.  Among  the  other 
things  which  must  remain  equal  are  the  beneficial  activities 
of  government  surrounding  the  property.  These  must  be 
neither  increased  nor  decreased.  If  other  things  remain  equal, 
the  permanent  removal  of  the  tax  should  raise  the  selling  value 
of  the  property.  But  if  the  removal  of  the  tax  means  a  break- 
down of  government,  no  such  result  is  to  be  anticipated. 

Capitalisation  and  Amortisation.  —  This  theory  that  the  tax 
affects  the  value  of  the  property  has  been  called  the  capitalisa- 
tion theory  or,  looked  at  from  another  point  of  view,  the  amor- 
tisation theory.     It  is  called  capitalisation  when  we  are  think- 


THE  INCIDENCE   AND   EFFECTS   OF  TAXATION      315 

ing  of  the  tax  as  vesting  in  the  government  a  theoretical  or 
constructive  interest  in  the  property.  It  is  called  amortisation 
when  we  regard  the  tax  as  involving  a  writing  off  by  the  taxed 
property  owner  of  a  part  of  the  value  of  his  property  in  pro- 
portion as  the  tax  is  to  the  total  income,  or  as  decreasing  the 
selling  value  of  the  property. 

The  clearest  illustration  is  found  in  a  permanent  tax  unex- 
pectedly levied  on  some  one  piece  or  class  of  property.  Thus 
if  certain  securities  which  it  was  expected  would  always  be  tax 
free  are  suddenly  subjected  to  a  tax,  it  is  ob\dous  that  they 
would  sell  thereafter  for  less  than  before.  He  who  was  the 
owner  at  the  time  of  the  imposition  of  the  tax  will  have  to 
write  off  or  amortise  the  capitalised  value  of  the  tax.  He  who 
buys  thereafter  obtains  them  at  a  price  which  is  based  on  the 
income  less  the  tax.  In  a  sense  he  holds  them  tax  free.  As 
Professor  Sehgman  has  well  shown,  it  is  the  exclusive  non-general 
character  of  the  tax  which  makes  this  case  so  clear.  Another 
feature  contributing  to  the  clearness  is  the  unexpectedness  of 
the  tax.  For  if  it  had  been  foreseen,  the  tax  would  have  been 
discounted  from  the  very  first. 

There  is  an  alluring  simplicity  about  this  theory  which  has 
tempted  many  to  overlook  some  of  the  grave  practical  diffi- 
culties of  its  application.  Thus  we  seem  to  arrive  at  the  con- 
clusion that  the  imposition  of  the  tax  involves  a  confiscation  of 
property  and  a  loss  falling  on  one  generation  to  the  exemption 
of  all  subsequent  generations.  But  the  hard-headed  business 
man  cannot  easily  be  convinced  that  the  tax  he  pays  on  his  land 
or  building  is  no  burden  on  him,  but  merely  represents  a  loss 
having  been  borne  for  him  by  the  previous  owners.  A  burdcnlcss 
tax  seems  to  involve  a  contradiction  in  terms.  Possibly  the  diffi- 
culty lies  in  the  fact  that  other  things  will  not  remain  equal, 
and  that  the  assumption  that  they  do  remain  equal  is  essential 
to  the  truth  of  the  theorem.  We  must  beware  that  we  do  not 
assume  that  the  loss  occasioned  by  the  imposition  of  the  tax 
is  other  than  theoretical.  It  may  be  merely  a  loss  of  some- 
thing which  would  never  have  been  had  but  for  the  grace  of 
government  and  the  good  use  of  tax  revenues. 


3l6  INTRODUCTION  TO  PUBLIC  FINANCE 

Another  way  of  stating  this  important  theory  is  that  a  perma- 
nent tax  makes  the  government  a  partner  in  the  property. 
The  larger  the  government's  partnership  interest  becomes,  the 
smaller,  so  runs  the  theory,  is  that  of  the  owner.  There  are 
two  dangers  in  this  analogy.  One  is  that  it  may  be  under- 
stood to  imply  that  the  government  is  a  non-contributing 
partner  seizing  but  not  creating  a  value,  reaping  where  it  has 
not  sown.  The  other  is  that  it  may  lead  one  to  think  of  the 
government's  interest  as  being  salable  capital,  similar  in  kind 
to  that  of  the  owner.     Such  it  distinctly  is  not. 

It  is  not  necessary  to  go  so  far  as  to  consider  what  would 
happen  to  the  value  of  the  owners'  capital  if,  because  of  the  re- 
moval of  the  tax,  government  disappeared  entirely.  For  in 
such  a  case  the  taxpayer  would  not  have  any  salable  property, 
the  very  law  on  which  property  rights  rest  disappearing.  But 
let  us  assume  that  the  non-collection  of  the  tax  meant  no  more 
than  poorer  government,  such  as  less  order,  worse  streets,  or 
poorer  schools.  Would  the  selling  value  of  the  property  rise 
by  removal  of  the  tax  under  such  circumstances?  Certainly 
not.  It  seems  then  that  the  government  is  usually  a  con- 
tributing partner  and  not  a  confiscatory  agency  at  all.  It  is  a 
silent  partner  as  to  the  inside  management  of  the  property, 
but  an  active  partner  as  concerns  the  outside  management  and 
environment  and  a  partner  often  bringing  into  the  firm  a  very 
goodly  contribution  indeed. 

Again  the  government's  partnership  interest  is  quite  unlike 
the  owner's  in  kind,  in  that  it  is  not  a  salable  interest.  The 
government  has  no  way  of  realising  its  interest  save  as  revenue 
through  the  annual  tax.  It  cannot  treat  it  as  capital  at  all. 
We  can  speak  of  it  as  a  capitalisable  interest  only  constructively 
and  for  purposes  of  computation  merely. 

The  kind  of  tax  we  have  here  under  consideration  is  one 
attaching  distinctly  to  the  property.  It  must  be  a  tax  on  the 
property  as  such,  or  it  may  be  on  the  income  from  the  property 
specifically  as  property  income.  A  general  income  tax  does  not 
satisfy  the  requirement  even  when  funded  or  property  income  is 
included. 


THE  INCIDENCE  AND   EFFECTS   OF  TAXATION      317 

In  discussions  of  the  capitalisation  theory  we  often  find  the 
tax  spoken  of  as  a  permanent  rent  charge.  So  conceived  it  is 
easy  to  shew  that  the  larger  the  rent  charge  the  smaller  the  re- 
maining interest  of  the  taxed  owner.  There  is,  however,  an 
important  difference  between  a  rental  and  a  tax.  A  rental 
collected  by  government  implies  that  the  property  is  in  the 
first  degree  public  or  communal  property  and  however  highly 
developed  the  private  rights  in  the  property  may  be  they  are 
secondary  in  character.  A  tax  implies  that  the  property  is 
primarily  private  property  subject,  however,  to  the  tax  levy. 
Sometimes  it  is  hard  to  draw  the  line.  The  so-called  land 
taxes  in  Bengal  are  computed  and  fixed  much  as  rentals  would 
be.  The  actual  cultivators,  the  ryots,  are  proprietary  tenants 
under  the  classes  of  superior  proprietors,  the  talukdars  and  the 
zamindars.  But  the  superior  proprietors  are  in  turn  tenants 
of  the  State  rather  than  taxed  owners.  When  an  old  land 
tax  is  turned  into  a  redeemable  rent  charge,  as  was  the  old 
British  land  tax,  it  seems  almost  to  lose  its  tax  character.  In 
such  cases  as  an  exception  to  the  rule  the  government  is  in 
point  of  fact  selling  its  old  tax  interest  as  capital. 

Very  different  indeed  from  those  ancient  charges  are  modern 
taxes  like  the  American  property  tax  or  that  part  of  the  British 
property  and  income  tax  which  falls  specifically  on  property 
incomes,  in  so  far  as  that  part  of  the  tax  is  separable  from  the 
general  income  tax. 

Sec.  5.  Incidence  of  the  American  General  Property  Tax.  — 
It  is  interesting  and  instructive  to  apply  this  theory  to  the  Ameri- 
can property  tax.  From  the  beginning  all  property  owners, 
or  would-be  property  owners,  have  known  that  there  would  be 
a  tax  on  the  selling  value  of  the  property.  They  knew  that  as 
property  advanced  in  value  the  increment  would  be  drawn  in 
and  become  taxable  as  well  as  any  original  value.  They  have 
probably  assumed  that  the  tax  rate  would  remain  the  same  or 
would  advance  very  slowly.  To  make  a  simple  numerical  illus- 
tration let  us  assume  that  the  anticipated  tax  was  at  the  rate 
of  i\  per  cent  of  the  selling  value  of  the  property  and  that  5  per 
cent  or  twenty  years'  purchase  is  to  be  used  in  capitalising 


3i8  INTRODUCTION  TO  PUBLIC  FINANCE 

income.  These  two  assumptions  amount  to  this.  Out  of 
every  $500  of  net  income  (tax  not  deducted)  $100  goes  to  the 
government  and  $400  is  retained  by  the  owner.  The  owner's 
share,  his  salable  property,  is  worth  $80  for  every  $4.00  of  his 
income  and  the  government  has  a  constructive  interest  worth 
$20  for  every  dollar  of  tax.  We  need  not  be  disturbed  by  the 
fact  that  the  income  which  determines  these  values  may  not  be 
present  income.  For  the  present  value  of  the  property  is  less 
the  more  remote  the  income  is  in  time.  The  ratios  remain 
substantially  the  same,  subject  only  to  slight  modifications 
arising  from  the  fact  that  the  tax  is  paid  every  year  even  though 
there  be  no  present  income. 

An  office  building  from  which  the  owner  clears  $5000  a  year 
before  payment  of  the  tax  would  represent  a  total  capitalised 
value  of  $100,000  divided  by  our  assumption  into  two  parts  or 
interests.  One  is  that  of  the  owner  and  is  worth  for  sale  $80,- 
000 ;  the  other  is  the  interest  of  the  government  constructively 
worth  $20,000.  He  who  bought  or  built  the  building  for 
$80,000  gets  his  5  per  cent  clear  on  $80,000  and  pays  a  tax  of  i|- 
per  cent  on  that  value.  The  government  gets  its  $1000  a  year 
in  taxes  representing  constructively  a  capital  value  of  $20,000. 
Assume  that  in  the  course  of  time  the  rental  income  rises  to 
$10,000  (before  payment  of  the  tax).  The  two  interests  double. 
One,  the  owner's,  is  now  $160,000,  the  other,  the  government's, 
is  $40,000.  If  the  tax  had  remained  at  $1000,  that  is,  if  the 
rate  had  fallen  the  two  shares  would  have  been  $180,000  and 
$20,000.  Can  we  say  that  by  reason  of  the  tax  not  falling  in 
rate  the  owner  has  lost  $20,000  of  his  increment?  Hardly,  for 
he  never  was  entitled  to  expect  the  rate  to  fall,  or  to  expect  the 
tax  to  stay  at  $1000.  He  cannot  be  said  to  have  lost  that 
which  he  never  had  nor  ever  anticipated  having.  Moreover, 
it  is  very  doubtful  if  government  had  not  kept  pace  in  its  devel- 
opment with  the  general  growth  whether  the  rents  would  have 
advanced  so  that  he  would  have  had  the  increase  of  $80,000  in 
capital  worth. 

But  suppose,  now,  that  the  government  plunges  into  reckless 
spending  of  no  direct  economic  value  to  the  community  or  to 


THE  INCIDENCE   AND   EFFECTS  OF  TAXATION      319 

the  property  owners  and  doubles  the  tax  rate  permanently. 
At  2^  per  cent  tax  the  owner's  share  drops  in  selling  value  to 
$133,333  and  the  government's  share  rises  in  constructive  value 
to  $66,666.  The  net  income  of  $10,000  divides  $6666  to  the 
owner  and  %2>m  to  the  government.  Since  the  tax  rate  is 
based  on  the  owner's  share,  which  falls  in  value,  a  doubling  of 
the  rate  does  not  double  the  government's  revenue.  Here  we 
see  capitalisation  working  in  full  force,  $26,666  being  trans- 
ferred from  one  partner  to  the  other.  But  it  is  important  to 
note  that  the  case  rests  on  the  assumption  of  uneconomic 
spending  of  the  tax  money.  For  otherwise  the  whole  value, 
capital  and  rental,  would  go  up. 

The  foregoing  explains  why  property  taxpayers  resent  and 
oppose  any  increase  in  the  tax  rate,  especially  a  sudden  one,  or 
a  transfer  to  the  property  tax  of  some  burden  heretofore  carried 
by  other  taxes.  It  also  helps  us  to  understand  why  property 
taxpayers  so  seldom  oppose  bond  issues  for  pubhc  improve- 
ments, even  though  such  issues  raise  the  tax  rate.  For  in  this 
case  they  hope  that  the  improvement  will  not  only  add  enough 
to  their  income  to  enable  them  to  pay  the  added  tax,  but  leave, 
perhaps,  something  over  for  themselves  as  well.  That  is,  the 
owner  of  the  building  used  in  our  illustration  might  approve  a 
new  water  system  if  he  hoped  it  would  raise  his  rental  income 
enough  to  pay  the  added  taxes. 

Within  proper  limits  and  with  the  reservations  above  set 
forth,  the  capitalisation  or  amortisation  theory  seems  applicable 
to  a  tax  on  any  kind  of  property.  Some  writers  have  confined 
it  to  land,  others  tt)  monopoly  property,  still  others  hold  it  true 
only  when  the  tax  is  not  universal.  It  certainly  affords  an 
important  approach  to  the  study  of  any  new  exclusive  tax  like 
the  British  increment  value  land  tax,  which,  as  shown  elsewhere, 
was  recognised  as  causing  an  immediate  drop  in  the  value  of 
the  lands  affected. 

The  notion  that  by  reason  of  amortisation  old  taxes  on 
property  become  burdenless  is  extremely  mischievous  for  it 
leads  to  a  light  regard  of  extravagance  in  pubhc  spending.  It 
is  only  wise  spending  by  a  good  government  that  makes  any 


320  INTRODUCTION  TO  PUBLIC   FINANCE 

taxes  easy  to  bear.     A  change  from  good  to  bad  government 
may  change  a  tax  once  easily  borne  into  grievous  confiscation. 

Sec.  6.  Personal  Income  Tax  Not  Shiftable.  —  We  con- 
sidered the  incidence  of  a  poll  tax  at  sufficient  length  in  the 
introductory  section.  Among  the  other  personal  taxes  the 
income  tax  is  clearly  of  most  importance.  Many  income  taxes 
can  be  broken  up  into  taxes  on  the  component  parts  of  income, 
and  thus  in  part  reduced  to  taxes  on  property  computed  by  the 
income.  But  a  universal  personal  income  tax  graduated  by 
the  size  of  the  income  and  not  determined  by  the  kind  or  source 
of  the  income,  seems  to  present  little  basis  for  shifting.  A 
differential  rate  on  funded  income  constitutes  a  tax  on  property, 
and  may  be  capitalised  as  shown  above.  So  far  as  the  income 
tax  includes  the  increment  value  of  property  it  is  likewise 
analogous  to  a  special  property  tax.  So  far  as  an  income  tax 
falls  on  wages  and  other  analogous  personal  earnings,  it  can  be 
shifted  only  when  it  creates  some  fundamental  change  in  the 
conditions  of  employment,  that  is,  the  market  for  personal 
services.  It  is  obvious  that  such  a  change  will  be  brought  about 
only  by  a  tax  that  is  not  uniform.  It  must,  to  be  shifted,  be  a 
tax  that  puUs  some  up  and  pushes  others  down.  In  a  uni- 
versal income  tax  properly  adjusted  there  is  little  chance  of  any 
such  change  and  we  may  conclude  that  for  the  most  part  the 
tax  stays  where  it  is  put.  All  things  considered,  the  income 
tax  more  nearly  than  any  other  absorbs  for  government  the 
equivalent  of  that  gain  which  accrues  to  the  individual  from 
good  government. 

Sec.  7.  Taxes  on  Producers  and  Dealers.  —  The  taxes  dis- 
cussed above  are  for  the  most  part  designed  with  some  care  and 
some  consideration  of  their  final  incidence.  They  are  aimed 
either  at  a  distinct  type  of  ability  or  at  abihty  in  general,  and  in 
the  main  they  reach  their  goal. 

Much  more  difficult  are  the  problems  of  the  incidence  of  those 
taxes  which  have  no  such  distinct  intent  as  to  incidence.  Taxes 
levied  or  falling  at  random  on  producers,  on  dealers,  and  on 
commercial  and  industrial  enterprises,  generally,  are  assessed 
and  levied  with  the  primary  consideration  of  getting  revenue. 


THE  INCIDENCE  AND   EFFECTS   OF  TAX.\TION      32 1 

Their  final  incidence  is  left  to  be  worked  out  by  the  interaction 
of  the  various  economic  forces  affected.  Thus  customs  duties 
and  excises  are  presumptively  borne  by  the  consumers  as  we 
have  seen  above.  The  operation  of  customs  is  in  the  main  so 
simple  as  to  present  few  difficulties. 

Taxes  Cannot  be  Shifted  at  Will.  —  There  is,  however,  a 
naive  assumption  often  made  by  business  men  and  the  pubhc, 
that  any  tax  levied  in  the  first  instance  on  a  producer,  on  a  dealer, 
on  a  commercial  or  on  an  industrial  enterprise  will  be  shifted 
along  to  the  ultimate  consumer  in  just  the  same  manner  as  a 
customs  duty,  for  example,  is  shifted.  The  thought  is  that 
costs  must  be  met,  and  accountants  put  taxes  down  with  the 
costs,  hence  all  the  producer  has  to  do  is  joyfully  to  add  the 
tax  to  the  price  and  presto  change  he  gets  it  back.  Generally 
no  distinction  is  made  between  taxes.  The  landlord,  as  we 
are  informed  by  the  newspapers,  passes  all  his  taxes  to  the 
tenants,  the  farmer  adds  his  school  and  road  tax  to  the  price 
of  wheat,  the  grocer  raises  the  price  of  butter  and  eggs,  tea, 
cofifee,  and  spices  in  order  to  get  back  his  income  tax,  and  above 
all,  the  railroads,  pubhc  utihties,  and  all  monopolies,  so  people 
say,  pass  on  their  taxes  to  the  long-suffering  pubhc  with  unerring 
certainty.  The  theory  is  simplicity  itself.  Its  adherents  seldom 
stop  to  inquire  what  good  it  does  the  farmer  to  shift  his  tax 
as  a  producer  if  as  a  consumer  he  receives  a  share  of  every  other 
producer's  taxes.  Above  all  these  theorists  fail  to  consider  that 
if  the  farmer  could  raise  the  price  of  wheat  just  because  his  road 
or  school  tax  has  gone  up,  there  could  have  been  nothing  to  pre- 
vent him  from  raising  the  price  of  wheat  before  that  new  tax 
was  levied.  Nor  do  they  seem  to  reahse  that  if  a  landlord  can 
raise  his  rents  because  he  pays  a  tax,  he  would  be  a  fool  and  a 
bad  citizen  as  well,  though,  perhaps,  a  "  good  fellow,"  not  to 
do  so,  tax  or  no  tax. 

The  fact  is  there  is  only  a  half  truth  in  this  naive  but  popular 
theory.  It  is  true  that  many  a  tax  levied  on  a  producer  or 
dealer  raises  prices,  rarely  by  the  whole  tax,  usually  by  a  large 
part,  occasionally  by  a  small  part  only.  But  the  great  fallacy 
in  the  popular  theory  lies  in  the  assumption  that  the  whole 


322  INTRODUCTION  TO  PUBLIC  FINANCE 

matter  lies  within  the  power  of  the  sellers  alone  to  determine. 
There  are  always  two  parties  to  a  sale,  a  buyer  as  well  as  a 
seller.  If  the  buyer  is  unwilling  or  unable  to  pay  a  price  high 
enough  to  cover  the  tax  as  well  as  the  costs,  or  can  get  the 
commodity  somewhere  else  for  less,  the  seller  cannot  raise  the 
price.  He  has,  then,  the  option  of  paying  the  tax  himself,  or 
quitting  production  and  seeking  to  make  a  living  somehow  else. 
As  taxes  are  now  very  nearly  universal  he  will  be  hard  put  to 
it  to  find  a  way  of  making  a  living  without  paying  a  tax.  The 
price  of  wheat  is  fixed  in  the  world  markets  for  wheat,  and  the 
Dakota  wheat  farmer  may  strive  as  hard  as  he  pleases  to  pass 
on  the  last  new  Dakota  tax  levy,  but  he  will  not  cause  even  a 
tiny  ripple  in  the  "  wheat  pit."  Nor  is  it  quite  conceivable  that 
a  Dakota  wheat  grower  would  accept  less  than  the  market 
because  his  taxes  happened  to  be  less  than  he  had  expected. 
If  office  buildings  are  scarce  relative  to  the  demand  office  rents 
will  be  high,  and,  as  the  world  goes,  probably  the  taxes  on  office 
buildings  will  be  high  too,  but  if  a  lot  of  new  office  buildings 
are  put  up  rents  will  come  down  and  there  is  not  therein  any 
definite  assurance  that  taxes  will  come  down  too.  In  fact,  as 
things  generally  go,  taxes  under  those  circumstances  are  a  little 
more  likely  to  go  up.  We  are  not  quarrelling  so  much  with  the 
conclusions  reached  by  these  naive  theorists,  although  they  are 
mostly  wrong,  as  we  are  with  the  line  of  reasoning  by  which 
the  conclusion  is  reached.  That  line  of  reasoning  proves  too 
much,  as  the  very  important  exceptions  noted  show. 

Sec.  8.  The  Tax  Can  be  Shifted  Only  if  Market  Conditions 
Change.  —  The  fact  is  that  the  tax  will  be  shifted  only  when 
its  imposition  alters  the  conditions  of  the  market  for  the  com- 
modity in  question.  It  must  first  actually  lessen  the  supply 
before  the  price  can  be  raised.  If  the  tax  does  that,  it  may  be 
shifted ;  if  not,  it  cannot  be  shifted.  The  Dakota  farmer,  as 
was  suggested  above,  cannot  add  his  taxes  to  his  price  just 
because  he  wants  to.  But  if  the  Dakota  taxes  are  so  high  that 
wheat  raising  does  not  pay  enough  to  cover  them  as  well  as 
the  costs  of  production,  wheat  raising  may  stop  in  Dakota  and 
the  consequent  reduction  in  the  world  supply  of  wheat  may 


THE  INCIDENCE   AND   EFFECTS   OF  TAXATION      323 

put  the  price  up.  If,  encouraged  by  the  subsequent  rise  in 
wheat  prices,  Dakota  farmers  return  to  producing  wheat  and 
the  new  supply  brings  down  prices  again,  some  of  them  may 
find  that  they  bear  the  whole  tax.  If  taxes  on  wheat  raisers 
were  absolutely  uniform  in  proportion  to  net  profits  all  over 
the  world,  an  equihbrium  would  presumably  be  struck  at  some 
level  of  prices  which  would  leave,  after  taxes  were  paid,  approxi- 
mately the  same  profit  (or  just  a  Httle  more)  to  the  wheat 
growers  as  they  could  get  in  any  other  industry.  A  certain 
degree  of  shifting  or  diffusion  of  the  taxes  would  have  taken 
place.  But  if  the  taxes  vary  greatly  from  one  wheat-growing 
community  to  another  it  is  idle  to  contend  that  all  would  be 
shifted.  For  it  is  so  obvious  that  he  who  runs  may  read,  that 
a  tax  in  one  locality  may  easily  be  high  enough  to  kill  the  indus- 
try there.  If,  again,  the  taxes  were  uniform  all  over  the  world 
per  ton  of  wheat  produced,  they  would  bear  heavily  on  those 
whose  costs  per  ton  were  high  and  be  negligible  for  those  whose 
costs  per  ton  were  very  low. 

While  the  considerations  discussed  immediately  above  bear 
on  all  types  of  taxes,  there  is  a  more  present  interest  in  taxes 
levied  on  production  or  on  products,  such  as  a  tax  on  gross 
sales,  gross  receipts,  and  taxes  at  so  much  per  unit  of  output. 
It  is  difficult  indeed  to  trace  the  incidence  of  these  taxes  fully. 
But  we  can  approximate  an  answer  to  the  questions :  (i)  whether 
they  will  cause  prices  to  rise,  and  (2)  whether,  if  they  do  so,  the 
producer  or  the  consumer  suffers  more.  Of  course  if  prices  do 
not  rise,  both  the  incidence  and  the  effect  are  wholly  on  the 
producer. 

A  Tax  on  Candy.  —  Let  us  take,  for  example,  the  tax  on 
candy  levied  in  the  United  States  during  the  war.  The  tax  was 
5  per  cent  of  the  manufacturer's  sales.  We  may  assume  what 
is  probably  the  case  (i)  that  the  ])usiness  is  competitive,  (2) 
that  the  demand  for  candy  is  elastic,  and  (3)  that  there  is  not 
much  difference  in  the  cost  per  pound  whether  produced  on  a 
large  scale  or  on  a  small  scale.  Probably  at  first,  after  the 
tax  is  imposed,  the  price  would  be  raised  by  (he  full  amount  of 
the  tax.     Then  the  effect  of  decreased  demand  would  be  felt 


324  INTRODUCTION  TO  PUBLIC   FINANCE 

and  prices  would  fall  a  little.  This  would  force  out  the  weaker 
manufacturers,  those  who  before  were  only  just  meeting  their 
costs.  Then  a  new  equilibrium  of  prices  would  be  reached  at  a 
price  which  practically  throws  all  the  tax  paid  on  the  consumer. 
But  production  is  less,  the  aggregate  profits  of  the  manufac- 
turer are  less,  and  the  manufacturers  and  their  employees  are 
not  quite  so  well  off.  The  verification  of  this  theory  by  the 
facts  since  our  tax  went  on  is  rendered  impossible  by  the  dis- 
turbed condition  of  prices  in  general  during  and  after  the  war. 

A  Tax  on  Milk.  —  Taxes  levied  on  goods  produced  under 
competition  and  at  increasing  cost  per  unit  of  output,  the 
demand  for  which  is  inelastic,  are  very  rare.  By  their  very 
nature  such  industries  are  carried  on  in  relatively  small  units, 
that  being  the  cheapest  way  to  conduct  them.  That  is  prob- 
ably one  reason  why  they  are  seldom  taxed  on  the  basis  of  prod- 
uct or  output.  But  again  it  may  be  that  they  do  not  seem  to 
be  proper  subjects  of  taxation  because  they  are  mostly  goods 
which  rank  as  necessities.  Only  in  the  field  of  food  and  other 
necessities  will  men  continue  the  unequal  fight  against  the  law 
of  diminishing  returns.  When  such  taxes  are  levied  they  are 
inevitably  shifted  in  toto  to  the  consumer.  A  tax  on  milk  is 
scarcely  a  political  possibility.  Yet  the  recent  regulations  re- 
quiring pasteurising  and  other  sanitary  measures  impose  in 
effect  a  tax  on  milk.  The  entire  cost  of  these  is  shifted,  as  any 
tax  would  be,  entirely  to  the  consumer,  for  any  part  borne  by 
the  producers  means  at  once  bankruptcy  of  the  marginal 
producers  and  lowered  supply  followed  by  higher  prices.  It  is, 
moreover,  practically  certain  that  the  consumer  in  such  cases 
as  this  will  suffer  more  than  by  the  mere  imposition  upon  him 
of  the  total  tax.  He  will  certainly  have  to  pay  the  cost  of 
shifting  it  as  well.  And,  furthermore,  as  the  tax  involves  the 
use  by  the  producer  of  added  capital  and  also  subjects  him 
to  greater  risk,  the  consumer  must  pay  for  all  that. 

A  Tax  on  Street  Railway  Gross  Receipts.  —  The  case  of  a  tax 
imposed  on  an  industry  obeying  the  law  of  increasing  returns 
is  very  different.  By  their  very  nature  these  become  monop- 
olistic, for  they  necessarily  produce  more  cheaply  on  a  large 


THE  INCIDENCE  AND   EFFECTS   OF  TAXATION      325 

scale  than  on  a  small  scale,  and  the  small  unit  cannot  survive 
in  competition  with  larger  ones.  Moreover,  the  demand  in 
these  industries  is  usually  elastic,  at  least  within  the  range  of 
prices  likely  to  be  set.  A  street  railway  may  ser\^e  as  an  illus- 
tration and  a  10  per  cent  tax  on  gross  receipts  will  be  assumed. 
Such  a  tax  on  a  street  railway  (leaving  out  of  consideration 
for  the  moment  regulation  of  its  rates  by  law)  will  raise  fares 
a  little,  but  not  nearly  enough  to  reimburse  the  company  for 
the  tax,  and  will  very  materially  reduce  its  profits.  Raising 
fares  means  loss  of  passengers,  and  lowering  fares,  within  any 
probable  range,  will  increase  travel.  The  expenses  of  a  street 
railway  fall  into  two  parts,  fixed  expenses  which  run  on  whether 
the  company  carries  few  or  many  passengers,  and  variable  ex- 
penses which  increase  or  decrease  in  exactly  the  same  ratio  as 
the  number  of  passengers.  The  following  table  shows,  very 
roughly,  the  effect  of  all  these  combined  elements  on  the  profits 
of  a  company : 


Rate  of 
fare 


cents 
S 
6 
7 
8 

9 

10 


Average 

number  of 

passengers 

carried  per 

day 


150,000 

122,500 

100,000 

82,000 

67,500 
SS.ooo 


Variable 

Net 

Tax 

10% 
of  gross 

Gross 

Fixed 

expenses, 

Total 

profits 

receipts'. 

expenses 

2c.  per 
passenger 

expenses 

before 
tax 

$7500 

$3500 

$3000 

$6500 

$1000 

$750 

7350 

3500 

2450 

S9SO 

1400 

73S 

7000 

3500 

2000 

S500 

1500 

700 

6560 

3SOO 

1640 

S140 

1420 

656 

6075 

3500 

1350 

4850 

1225 

607 

5500 

3500 

1 100 

4600 

900 

SSO 

Net 

profits 

after 

tax 


$250 
66s 
800 

764 
618 
35° 


It  is  obvious  that  if  there  were  no  tax,  and  the  company 
could  fix  the  rate  of  fare  where  it  pleased,  it  would  probably  fix 
the  rate  at  seven  cents,  for  at  that  rate  it  makes  a  profit  of 
$1500  per  day,  which  is  larger  than  it  would  get  at  any  other 
rate.  Closer  inspection  of  the  table  shows  that  if  it  were  pos- 
sible to  collect  fares  in  fractions  of  a  cent,  the  company  might 
prefer  to  fix  the  rate  at  about  7.05  cents,  for  it  will  be  observed 
that  the  profits  fall  away  a  little  faster  below  seven  cents  than 
they  do  above  seven  cents,  indicating  that  there  is  a  maximum 
profit  at  a  rate  somewhere  between  seven  cents  and  eight  cents 


326  INTRODUCTION  TO  PUBLIC  FINANCE 

greater  than  at  exactly  seven  cents.  But  as  the  difference 
between  $1400  at  six  cents  and  $1420  at  eight  cents  is  small,  it 
would  be  but  a  trifle  over  seven  cents. 

At  first  glance  it  might  be  inferred  that  the  company  would 
also  make  the  largest  possible  profit  after  paying  the  tax,  if  it 
charged  seven  cents  as  before  rather  than  any  other  rate.  For 
if  it  went  up  to  eight  cents  it  would  make  only  $764  as  against 
$800  at  seven  cents.  But  again  one  must  carefully  observe 
the  figures  above  and  below  the  seven-cent  line.  The  drop 
from  $800  at  seven  cents  to  $665  at  six  cents  is  a  drop  of  $135, 
while  the  drop  from  $800  at  seven  cents  to  $764  at  eight  cents 
is  only  $36.  This  is  a  greater  proportional  difference  than  be- 
fore the  tax  and  is  too  great  a  difference  to  be  neglected.  It 
indicates  that  there  is  a  maximum  profit  greater  than  $800  to 
be  had  somewhere  between  seven  cents  and  eight  cents.  A 
separate  calculation,  which  it  scarcely  seems  necessary  to  intro- 
duce here,  shows  that  at  seven  and  one-quarter  cents  the  net 
profits  after  paying  the  tax  would  be  about  $812  and  that 
is  the  maximum  profit  it  could  obtain  at  any  rate  of  fare.  The 
interesting  and  vitally  important  thing  is  that  this  after-the-tax 
maximum  profit  always  corresponds  to  a  higher  rate  of  fare  than 
does  the  before-the-tax  maximum.  It  is  never  much  higher  but 
always  higher.  With  the  particular  figures  used  in  our  illus- 
tration it  was  7.25  cents  as  against  7.05  cents,  approximately. 

No  public  utility  commission  can  restore  to  the  company  its 
lost  profits  or  reimburse  the  whole  tax.  Humpty-dumpty 
pro"fits  made  his  fall  when  the  tax  was  imposed  and  can't  be  put 
together  again  as  long  as  the  tax  continues.  If  before  the  tax 
went  on,  the  legal  rate  in  the  illustration  were  five  cents  (which, 
everything  considered,  was  far  too  low)  and  the  profits  were, 
as  in  the  table,  $1000,  and  if  after  the  tax  the  company  were 
permitted  to  raise  the  rate  to  seven  cents,  it  would  still  be 
$200  shy  on  former  profits. 

To  sum  up,  then,  the  effects  of  the  tax  are :  (i)  a  slight  raise 
in  rates  (if  permitted),  (2)  if  rates  are  raised  a  goodly  number 
of  people  walk  or  stay  at  home  or  ride  in  automobiles  who 
would  otherwise  ride  on  the  cars,  (3)  the  profits  of  the  com- 


THE  INCIDENCE  AND   EFFECTS  OF  TAXi\TION      327 

pany  are  inevitably  lessened,  whether  rates  are  raised  or  not, 
(4)  new  capital  is  consequently  harder  to  get,  and  (5)  if  rates 
are  raised  fewer  platform  men  and  other  workers  fmd  employ- 
ment. 

Sec.  9.  A  Tax  on  Gross  Sales.  —  Among  recent  suggestions 
for  post-war  taxes  is  one  for  a  tax  on  gross  sales.  Generally 
this  is  understood  to  mean  a  tax  say  of  i  per  cent  or  2  per  cent 
on  the  gross  amount  for  which  any  goods  are  sold.  What 
would  be  the  probable  incidence  of  such  a  tax?  Would  it  all 
be  passed  on  to  the  consumer  ?  If  the  foregoing  considerations 
are  correct  its  shifting  and  incidence  would  be  most  unequal. 
In  some  cases  it  would  be  passed  on,  in  others  it  would  be  ab- 
sorbed by  the  producers.  If  the  demand  were  very  stubborn  the 
consumer  would  bear  the  tax  and  more.  If  the  demand  were 
very  elastic  the  producer  or  seller  might  have  to  absorb  it.  If 
the  cost  of  producing  or  selling  were  constant  per  unit  of  output 
the  effect  would  be  different  from  a  case  where  it  was  a  dimin- 
ishing or  an  increasing  cost. 


CHAPTER  XII 

FEES   AND  INDUSTRIAL  EARNINGS  > 

Section  i.  The  Connection  between  Fees  and  Industrial 
Earnings.  —  There  is  the  closest  sort  of  connection  between 
fees  and  the  industrial  and  commercial  earnings  of  the  State. 
In  the  case  of  the  sale  of  goods  or  services  by  a  State  the  private 
persons  pay  the  price  of  the  wealth  which  they  obtain.  The 
price  is  fixed  by  economic  conditions.  It  cannot  exceed  a 
certain  sum,  for  if  it  does,  the  citizen  will  not  buy.  But  in  most 
cases  considerations  of  a  pubHc  character  induce  the  State  to 
enter  upon  the  industry  or  commercial  enterprise,  and  these 
very  considerations  are  inducements  to  a  lowering  of  the  charges. 
As  the  public  element  comes  to  be  more  clearly  recognised,  a 
part  of  the  economic  forces  fail  to  act.  The  State  sacrifices 
part  or  all  of  the  gain,  but  makes  no  loss.  As  the  pubHc  ele- 
ment presses  still  more  to  the  front,  the  State  pays,  at  the  general 
cost,  a  part  of  the  expense,  and  charges  the  particular  persons 
specially  benefited  merely  a  fee  for  the  service.  Many  modern 
public  institutions  have  gone  through  a  process  of  development 
from  one  stage  to  the  other,  and  the  different  stages  are  found 
contemporaneously  in  different  countries.  But  while  this  is 
the  order  of  progression  in  new  functions,  it  is  not  the  historical 
order  of  the  rise  of  these  two  forms  of  payment  for  public  ser- 
vices.    Fees  are  the  older  of  the  two. 

Fees  and  the  Consciousness  of  "  Public  "  Life.  —  Fees  are 
not  to  be  found  in  the  ancient  civilisations,  because  of  the  inti- 
mate relation  between  the  individual  and  the  State.  Only 
when  there  is  a  distinct  consciousness  of  "  public  "  functions 

*  For  definitions  and  classification,  see  Chap.  U. 
328 


FEES   AND   INDUSTRI.\L   EARNINGS  329 

can  we  have  fees.  Payments  in  the  Middle  Ages  for  the  services 
of  the  courts,  of  the  church,  of  the  schools,  etc.,  were  mainly 
of  the  nature  of  private  remuneration.  As  soon,  however,  as 
any  function  comes  to  be  recognised  as  public  in  character,  fees 
arise.  At  first  contributions  are  more  or  less  freely  and  willingly 
rendered  for  the  use  of  markets,  roads,  bridges,  protection,  and 
the  like.  Frequently  there  is  an  arbitrary  assumption  made 
that  a  special  benefit  is  conferred  and  a  fee  is  charged.  As  the 
State  emerges  from  feudalism,  the  growth  of  public  consciousness 
is  marked  by  a  rapid  multiplication  of  these  fees,  which  form  a 
system  of  public  revenues  without  taxes.  After  that  the  line 
of  development  is  in  the  direction  of  the  curtailment  of  the  fee 
system  and  the  growth  of  the  tax  system.  Fees  mark  the 
transition  stage  in  the  division  of  labour  in  the  public  service. 
There  is  a  growth  of  the  conception  of  common  benefits  as 
distinct  from  special  private  benefits,  and  a  corresponding 
removal  of  functions  from  one  to  the  other  category.  At  the 
same  time  new  functions  arise  which  are  supported  by  fees, 
until  finally  the  recognition  of  public  interest  outweighs  that  of 
the  individual  interest.  Some  fees,  however,  become  fixed  in 
character  and  are  not  subject  to  these  transforming  tendencies ; 
but  the  public  interest  is  recognised  in  this  case  by  limiting  the 
fees  to  a  very  small  part  of  the  total  cost.  Thus  many  court 
fees  are  retained,  but  the  larger  part  of  the  rapidly  growing 
expenditure  for  the  support  of  justice  is  now  met  from  taxes. 
Those  functions  in  connection  with  which  there  are  fees  are 
regarded  as  conferring  a  divided  benefit.  The  individual  pays 
for  what  he  receives,  the  State  for  what  the  public  gains  thereby. 
Sec.  2.  Judicial  and  Legal  Fees.  —  The  extension  of  the 
fee  system  by  the  courts  to  cover  a  very  large  part  of  the  cost 
of  the  judicial  system,  even  to  such  a  degree  as  to  make  litiga- 
tion impossible  to  all  but  the  rich,  was  a  transition  stage  in  the 
development  from  the  Middle  Ages  to  the  present.  Nowhere 
was  the  fee  system  for  court  costs  more  abused  than  in  England. 
Later  practice,  while  placing  more  of  the  burden  on  the  general 
treasury,  has  retained  an  extensive  tarifi"  of  such  "  costs." 
Moreover,  in  not  a  few  instances,  the  assessment  of  the  "costs" 


330  INTRODUCTION  TO  PUBLIC   FINANCE 

upon  the  party  responsible  for  the  litigation,  as  shown  by  the 
fact  that  he  loses  his  suit,  makes  these  fees  approach  in  character 
punitive  fines.  This  is  the  characteristic  of  American  practice. 
In  many  cases  the  special  benefit  conferred  is  not  very  clear, 
but  is  arbitrarily  assumed  to  exist,  and  the  fee  levied  as  though 
it  were  for  such  benefit.  * 

Since  the  middle  of  the  seventeenth  centurj^,  a  large  part  of 
many  of  the  legal  fees  have  been  collected  by  means  of  stamps 
or  stamped  paper,  the  latter  being  necessary  to  legalise  the 
transaction ;  the  officer  who  furnished  or  cancelled  the  stamp 
being  supposed  to  investigate  and  vouch  for  the  propriety  of 
the  transaction.  A  notary's  fee  in  most  of  the  American  com- 
monwealths is  of  this  character,  the  fee  being  receipted  for  by  a 
stamp  embossed  upon  the  paper.  Similar  fees  or  taxes  on  acts 
and  transfers  are  very  common  in  France.  Other  such  fees  are 
collected  in  the  form  of  the  sale  of  a  license  to  perform  certain 
acts  which  would  not  be  legal  without  such  a  permit ;  and  then 
there  is  a  charge  for  recording  the  act  after  it  has  been  performed 
in  accord  with  the  permit.  Of  this  character  are  the  fees  for 
marriage  licenses  and  recording  of  marriages.  The  act  itself  is, 
also,  often  subject  to  the  payment  of  a  tax.  The  general  char- 
acter of  the  legal  fee  is  seen  from  the  following  list :  fees  for  pass- 
ports and  similar  papers  of  identification,  fees  for  recording  and 
legally  recognising  births,  deaths,  marriages,  and  divorces, 
changes  of  residence  or  legal  standing,  for  papers  in  evidence 
of  honours,  degrees,  orders,  titles,  offices,  etc.,  for  patent  rights 
and  copyrights,  for  consular  services  in  vouching  for  invoices,  etc. 

Sec.  3.  Administrative  Fees.  —  Many  of  the  acts  of  the 
various  administrative  departments  are  of  such  a  character  as 
sometimes  to  confer  a  special  benefit  upon  individuals  for 
which  a  fee  is  charged.  The  police  may  render  extraordinary 
services  as  in  the  protection  of  property  on  special  occasions, 
in  the  control  of  masses  of  people,  preventing  intrusion,  etc. 
Examples  of  these  special  services  are  very  frequent.  The  same 
is  true  of  the  special  services  of  detectives  for  private  persons. 

Educational  Fees.  —  Fees  for  public  education  are  gradually 
falling  into  disuse.     They  were  originally  charged  for  all  grades 


FEES  AND  INDUSTRIAL  EARNINGS  33 1 

of  instruction  from  the  lowest  up  to  the  university.  The 
importance  of  primary  education  to  the  general  welfare  of  the 
people  and  to  the  prosperity  of  the  State,  when  governed  by 
popular  franchise,  led  to  the  abolition  of  fees  for  that  grade  of 
instruction  at  a  very  early  date.  In  England,  owing  to  the 
prevalence  of  an  extreme  laissez-faire  view  upon  this  subject, 
fees  for  education  were  continued  longer  than  in  most  countries, 
having  only  very  recently  been  entirely  abolished.  In  the 
higher  grades,  wherever  such  were  in  charge  of  the  State,  fees 
were  retained  much  longer  than  elsewhere.  The  great  univer- 
sities of  the  American  commonwealths  have  set  the  example 
of  free  tuition  for  their  thousands  of  students,  although  they 
still  retain  a  number  of  small  fees  for  registration,  diplomas, 
and  certain  incidental  expenses  connected  with  laboratory  and 
similar  instruction.  European  State  universities  still  generally 
retain  the  fee  system  for  most  of  the  lecture  courses.  Schools 
intermediate  between  those  giving  rudimentary  education  and 
the  universities  are  generally  managed  without  fees,  like  the 
lower  grades.  Educational  functions  of  governments  seem  to 
have  been  going  through  the  same  transformation  which  roads 
have  gone  through.  Already  the  larger  part  of  the  cost  is  met 
from  general  taxes  and  but  a  small  part  from  fees.  Finally  the 
remaining  fees  will  fall  away. 

Church  Fees.  —  In  those  countries  in  which  the  State  supports 
the  churches,  or  churches  of  a  certain  denomination,  there  are 
a  number  of  fees  connected  therewith,  such  as  those  for  the  use 
of  churches  and  churchyards,  for  baptisms,  christenings,  mar- 
riages, burials,  confirmations,  and  communion.  The  means  for 
meeting  the  rest  of  the  expenses  are  drawn  from  two  sources. 
A  part  is  sometimes  taken  from  the  general  taxes  or  from  special 
taxes  collected  for  the  purpose,  and  the  remainder  from  volun- 
tary contributions  by  the  attendants,  or  from  the  sale  of  sittings 
and  the  Uke.  This  is  the  only  important  remnant  of  voluntary 
contributions  in  any  part  of  the  financial  system.  In  most 
instances  the  voluntary  contributions  are  for  special  purposes, 
organised  charity,  missions,  etc.,  which  are,  perhaps,  not  prop- 
erly considered  of  a  pubhc  character. 


332 


INTRODUCTION  TO  PUBLIC   FINANCE 


Commercial  Fees.  —  The  fees  rendered  by  individuals  in 
connection  with  their  industrial  and  commercial  enterprises 
are  very  numerous.  The  oldest  and  simplest  are  charges  for 
the  use  of  market-places,  later  for  the  use  of  pubhc  exchanges, 
etc. ;  then  come  the  charges  for  statistics  collected  by  public 
officers,  and  the  charges  for  the  use  of  bridges,  roads,  quays, 
etc.  The  modern  substitutes  for  roads  —  railroads,  canals, 
street  railroads,  omnibuses  —  are  already  passing  from  private 
into  public  hands,  and  the  period  of  transition  is  marked  by  a 
more  and  more  extended  use  of  the  fee  system.  Other  means 
of  communication  —  the  post,  the  telegraph,  and  the  telephone 
—  are  of  the  same  character.  Fees  for  coinage  are  also  for  ser- 
vices to  commerce.  They  are  in  use  by  every  country  in  some 
form  or  other.  In  the  United  States  the  charge  for  coinage 
was  one-fifth  of  one  per  cent.  England  allows  the  Bank  of 
England  to  make  a  similar  charge  when  advancing  notes  upon 
bullion,  and  to  set  the  price  in  notes  for  gold  coin  and  gold  bars. 
These  fees  must  not  be  confused  with  the  charges  known  as 
seigniorage,  the  latter  being  a  tax  upon  commerce. 

Sec.  4.  Special  Assessments.  —  One  of  the  most  important 
classes  of  fees  is  formed  by  special  assessments.  They  are  for 
some  benefit  to  real  property.  A  special  assessment  is  a  fee 
paid  to  cover  the  cost,  less  that  of  supervision  by  a  salaried 
pubhc  officer,  of  a  specified  improvement  to  property  under- 
taken in  the  public  interest.  In  his  excellent  study  on  this 
subject  Mr.  Rosewater  ^  tries  to  establish  a  difference  between 
fees  and  special  assessments.  He  admits  the  similarity,  but 
points  out  that  special  assessments  are  restricted  in  purpose  and 
in  place,  are  apportioned  among  the  members  of  a  class,  are 
assessed  once  and  for  all  and  for  benefits  to  real  property  only. 
Professor  Sehgman  makes  the  same  distinction.  But  it  is 
certainly  not  defensible  on  purely  theoretical  grounds,  for  the 
differences  are  not  essential,  but  accidental.  We  might  as 
well  set  up  a  separate  class  of  taxes  on  marriages,  for  they  are 
restricted  in  purpose,  are  assessed  upon  members  of  a  class, 
once  and  for  all,  and  are  for  benefits  to  the  family  only.     Like 

1  Columbia  College  Studies,  Vol.  II,  3- 


FEES  AND  INDUSTRIAL   EARNINGS  ^^S 

all  other  fees,  special  assessments  are  imposed  by  the  taxing 
power,  cover  both  public  and  private  benefits,  and  do  not 
exceed  the  costs. 

The  simplest  case  of  a  special  assessment  is  when  a  street  is 
to  be  built,  with  necessary  sewers  and  water-pipes.  The  costs 
of  this  have  to  be  met.  There  is  a  public  interest  in  the  street  as 
a  thoroughfare.  Private  enterprise  cannot  be  trusted  to  properly 
protect  the  public  interest.  The  city,  therefore,  must  step  in. 
It  could  pay  the  cost  from  general  taxes  or  from  tolls,  of  both 
of  which  the  specially  benefited  persons  would  pay  their  share. 
But  in  that  case,  temporarily  at  least,  the  abutting  land  owners 
would  reap  an  unearned  harvest  at  the  expense  of  their  fellow- 
citizens.  It  appeals  to  our  sense  of  justice  that  they  should 
pay  for  it.  They  can  always  afford  to  do  so,  as  they  gain  by 
the  improvement.  This  system  has  received  large  currency  in 
the  United  States,  and  has,  according  to  Mr.  Rosewater's 
extensive  investigations,  given  general  satisfaction. 

Another  method  has  been  used  to  some  extent  in  England. 
It  is  similar  to  that  used  by  private  speculators  in  America, 
when  they  open  up  a  new  city,  or  suburb.  The  city  condemns 
and  buys  up  enough  of  the  land  to  be  improved  to  furnish, 
when  sold  after  the  improvements,  the  funds  needed.  This 
method  has  a  very  limited  application. 

Special  assessments  are  not  frequent  in  Europe,  but  do 
occur.  Mr.  Rosewater  finds  them  in  varied  form  in  France  and 
Germany ;  and  they  are  proposed  in  England  under  the  name 
of  the  "  betterment  "  tax.  In  the  last-named  country  they 
were  early  applied  to  "  walls,  ditches,  gutters,  sewers,  bridges, 
etc.,  damaged  by  the  sea."  But  not  until  lately  has  the  prin- 
ciple of  measuring  the  tax  by  the  particular  benefit  been  applied 
or  proposed,  and  even  now  the  principle  is  not  quite  clear.  In 
England  the  assessment  is  to  cover  the  cost  of  the  removal  of 
injury  rather  than  the  cost  of  conferring  a  benefit.  In  England 
the  cost  of  improvements  is  assessed  in  general  taxes  from  which 
certain  unbenefited  districts  are  exempt.  Strictly  speaking, 
the  priiicipk;  is  nof  regularly  applied  in  England  ;il  all. 

In  the  United  Stales  this  fee  finds  almost  universal  acceptance. 


334  INTRODUCTION  TO  PUBLIC   FINANCE 

It  is,  indeed,  remarkably  well  suited  to  the  economic  conditions 
of  a  new  country,  and  renders  rapid  improvement  possible. 
In  some  parts  of  the  country  there  are  harmful  results  that 
arise  from  the  desire  to  give  property  owners  full  control  over 
the  improvements  for  which  such  assessments  are  to  be  made. 
Thus,  in  some  commonwealths,  street  improvements  are  only 
made  with  the  consent  of  the  owners  of  a  majority  of  the  property 
concerned.  The  result  is  that  streets  are  opened  irregularly, 
and  some  of  the  main  streets  are  untouched,  while  side  streets 
are  improved.  But  this  is  an  evil  of  expenditure  rather  than 
necessarily  connected  with  this  mode  of  collecting  the  revenue. 
The  abuses  of  special  assessments  are  few,  and,  on  the  whole, 
it  is  a  part  of  the  tax  system  of  which  America  can  be  justly 
proud.  Professor  Bastable's  criticism  (p.  377)  of  these  fees 
rests  upon  a  misconception  of  the  method  of  handling  the 
assessments.  They  are  assessed  according  to  the  cost  of  the 
improvements ;  the  special  benefit  is  the  justification  of  the  con- 
tribution, not  its  measure.  There  is  seldom  any  difficulty  in 
apportioning  the  cost  fairly.  No  charge  need  be  made  for  any 
additional  benefit  beyond  the  cost,  and  the  contributor  has, 
usually,  a  voice  in  deciding  whether  the  proposed  improvement 
shall  be  undertaken  or  not. 

In  view  of  the  fact  that  the  prevailing  theory  of  taxation 
in  this  country  is  that  which  we  have  designated  as  the  benefit 
theory,  it  is  natural  that  Americans  should  have  been  the  ones 
to  have  made  the  application  of  the  theory  in  this  particular 
case.  The  special  assessment  is  applied  in  just  those  cases  in 
which  it  is  easiest  to  measure  the  special  benefit.  And  although 
the  principle  cannot  be  given  a  wider  application  with  any 
degree  of  satisfaction,  it  does,  in  this  instance,  comply  with  the 
demands  of  justice  and  equality.  It  would,  moreover,  be 
rather  hard  to  find  under  the  faculty  theory  any  better  justi- 
fication. 

Sec.  5.  Postal  Fees.  —  The  post  was  included  above  among 
those  functions  for  which  fees  were  charged.  Whether  that  be 
quite  correct  or  not,  depends  upon  the  way  in  which  the  postal 
system  is  run.     If  it  is  run  so  as  to  yield  the  largest  possible 


FEES  AND   INDUSTRIAL   EARNINGS  335 

revenue  over  and  above  expenses,  it  is  of  exactly  the  same  char- 
acter as  any  other  industrial  enterprise  upon  which  the  State 
enters.  The  State  sells  postal  services  for  the  highest  price  it 
can  get,  or  rather,  for  the  largest  net  return.  Its  profits,  the 
post-office  being  a  monopoly,  are  regulated  by  the  principle  of 
charging  what  the  traffic  will  bear.  But  no  post-office  is  run  on 
this  principle.  The  importance  of  the  public  service  rendered 
has  led  to  the  recognition  of  a  large  element  of  common  benefit. 
This  recognition  has  not  resulted  in  the  entire  abandonment 
of  charges  for  the  ser\ace  except  in  a  few  instances ;  for  example, 
the  free  carriage  of  newspapers  in  the  county  in  which  they  are 
pubHshed.  But  it  has  led  to  the  attempt  to  run  the  service 
in  such  a  way  that  expenses  shall  be  met,  and  only  a  small 
surplus,  if  any,  shall  accrue  to  the  benefit  of  the  treasury. 
WTienever  the  surplus  tends  to  grow,  the  rates  are  lowered  or 
the  service  improved.  Of  all  the  powers.  Great  Britain  is  the 
sole  exception  to  this  rule,  about  one- third  of  her  postal  receipts 
being  profits.  (1895,  receipts  £10,760,000,  expenses  £6,869,000. 
But  the  allied  telegraph  service  ran  behind :  receipts  £2,580,000, 
expenses  £2,674,000.)  The  postal  rates  in  Great  Britain  are 
as  low  as  in  other  countries,  but  the  surplus  is  accounted  for  by 
the  extremely  small  size  of  the  territory  covered  by  the  land 
service,  the  concentration  of  population,  and  the  cheapness  of 
water  transportation,  all  of  which  makes  it  particularly  easy  to 
do  a  large  and  profitable  business  at  low  rates. 

There  are  some  writers  who  regard  any  surplus  acquired  in 
this  way  as  practically  the  result  of  taxation,  and  class  any 
charge  for  the  public  service,  above  the  cost  thereof,  as  a  special 
tax.  This  classification  presupposes  that  the  service  is,  by 
nature,  of  a  public  character,  an  assumption  contrary  to  the  fact, 
for  no  function  except  that  of  governing  itself,  in  the  narrowest 
possible  sense,  is  hy  nature  of  a  public  character,  nor,  on  the 
other  hand,  hy  nature  of  a  private  character.  On  this  considera- 
tion, therefore,  it  is  better  to  class  these  gains,  not  as  taxes,  but 
as  the  earnings  of  a  public  industry. 

Sec.  6.  Public  Industries  not  Primarily  for  Revenue.  —  In 
modern  times  public  industries  can  be  quite  as  properly  con- 


336  INTRODUCTION  TO  PUBLIC   FINANCE 

sidered  under  the  head  of  expenditure  as  under  that  of  revenue. 
Historically,  State  industries,  like  pubHc  or  princely  domains, 
lands,  forests,  and  mines,  were  mainly  sources  of  revenue. 
But  a  railroad  is  placed  in  the  hands  of  the  State  primarily 
because  of  the  public  interests  involved,  and  the  expenditure 
for  that  purpose  is  more  significant  than  the  moderate  surpluses 
that  accrue,  in  some  cases,  to  the  government.  For  that  reason 
we  called  attention  to  these  activities  under  the  head  of  expen- 
diture. We  have  now  to  consider  them  as  productive  of  so 
much  total  wealth,  a  part  of  which  is  immediately  spent  for  the 
purpose  which  led  the  State  into  this  activity,  and  a  part,  gen- 
erally a  very  small  part,  saved  to  assist  in  the  accomplishment  of 
other  purposes. 

Public  Lands.  —  The  oldest  form  of  public  property  is  land. 
The  public  land  originally  embraced  all  the  territory  of  the 
State.  Gradually  parts  of  it  were  ahenated  to  a  private  pur- 
pose subject  only  to  the  law  of  eminent  domain ;  but  consid- 
erable portions  even  to  the  present  day  belong  to  the  State,  or, 
what  is  the  same  thing,  to  the  local  governments.  In  the  mon- 
archies of  Europe  such  lands  were  once  considered  the  property 
of  the  prince.  These  lands  were  the  main  reliance  for  public 
revenues  in  the  feudal  State.  As  the  people  gained  a  voice  in 
the  government,  they  laid  claim  to  these  sources  of  revenue 
for  public  purposes.  From  that  time  on,  the  public  domain  di- 
minished both  absolutely,  by  sale  or  alienation,  and  relatively  as 
the  wealth  of  the  people  swelled.  Some  countries  adopted  a 
very  conservative  policy  in  this  respect,  and  retained  their 
domains  in  land  and  forests,  while  others  adopted  the  plan  of 
steadily  disposing  of  them.  German  states  are  examples  of  the 
former  poHcy,  while  England,  France,  and  the  United  States 
have  been  examples  of  the  latter.  England  receives  only 
£520,000  annually  of  "  Woods,  Forests,  and  Land  Revenues 
of  the  crown."  In  the  United  States  it  was  the  possession  of 
vast  tracts  of  land  by  the  federal  government,  acquired  by 
gift  from  the  commonwealths,  and  by  purchase,  which  gave 
that  government  an  independent  territory  over  which  its  control 
was  absolute,  and  formed  one  of  its  strongest  supports,  contribut- 


FEES  AND   INDUSTRIAL   EARNINGS  337 

ing  most  materially  to  the  growth  of  federal  influence.  But 
the  public  lands  have  not  been  a  source  of  revenue  to  the  govern- 
ment. The  money  received  from  settlers  has  amounted  to  little 
more  than  fees  for  the  registration  of  titles,  and  except  for  the 
ten  years  from  1830  to  1840  the  lands  have  not  yielded  a  clear 
revenue.  The  extensive  surveys  which  the  government  carried 
out  have  been  a  large  expense  attributable  to  this  source. 
Under  constitutional  government  there  is  little  danger  of  the 
failure  of  taxation  as  a  permanent  and  regular  source  of  revenue. 
So  that  pubHc  lands  are  not  regarded  as  necessary  for  the 
integrity  of  the  government.  The  retention  of  pubhc  lands 
in  Germany  and  Austria  is  not  explainable  by  any  danger  of  the 
failure  of  taxation,  but  by  the  greater  tenacity  of  the  older 
communistic  idea.  Democratically  governed  cities  and  towns 
cling  to  their  lands  as  strongly  as  the  royal  governments. 

Forests.  —  Except  when  in  charge  of  a  highly  trained  body 
of  expert  officials,  as  in  Germany,  the  public  lands  do  not  form 
a  satisfactory  source  of  revenue.  They  are  not  as  a  rule  as  well 
managed  as  similar  lands  in  private  hands.  Forests  form  an 
important  exception  to  this  statement.  A  private  owner  can- 
not afford  to  wait  long  enough  for  economical  use  of  timber 
land.  The  destruction  of  forests  at  private  hands  is  a  serious 
danger.  Only  a  permanent,  long-lived  institution  like  the 
government  can  take  proper  care  of  forests. 

Mines.  — ■  Closely  allied  with  the  public  ownership  of  lands 
and  forests  is  the  public  ownership  of  mines.  This  is  one  of  the 
oldest  State  industries,  which  is  of  late  falling  into  disuse. 
The  working  of  mines  by  the  government  is  being  replaced  in 
Europe  by  a  system  which  allows  of  private  operation,  but 
guarantees  the  public  interest  by  the  collection  of  royalties,  or 
mining  taxes.  In  the,  older  countries,  where  the  idea  of  public 
territorial  ownership  is  stronger,  the  old  system  still  prevails, 
and,  even  where  it  is  partially  surrendered,  the  revenues  derived 
from  royalties  and  taxes  are  proportionately  large.  But  in  the 
new  countries  of  the  American  continent  and  Australia  private 
ownership  generally  prevails,  and  no  more  revenue  is  derived 
from  this  source  than  from  any  other  taxed  industry.    The 


338  INTRODUCTION  TO  PUBLIC   FINANCE 

feudal  idea  of  territorial  ownership,  a  remnant  of  which  still 
survives  in  those  countries  of  Europe  which  retain  their  in- 
terests in  the  mines,  is  very  different  from  that  of  private  owner- 
ship in  fee  simple  as  in  America.  This  accounts  for  the  dififer- 
ence  in  the  revenues  from  this  source. 

Sec.  7.  Other  Industries.  —  But  while  the  modern  State 
has  surrendered  the  extractive  industries,  a  great  many  others 
have  been  undertaken,  not  so  much  as  sources  of  revenue  as 
because  of  the  importance  of  the  public  interests  involved. 
Before  the  nineteenth  century  the  most  striking  instances  are  of 
the  production  of  some  commodity  needed  for  the  public  ser- 
vice or  of  articles  of  an  artistic  and  costly  character.  Examples 
of  the  latter  are  the  Gobelin  tapestries  and  the  Sevres  ware. 
In  supplying  arms,  forts,  vessels,  public  buildings,  and  the  like 
there  is  no  uniformity  of  practice  among  the  nations.  In  only 
a  few  cases  is  the  method  regularly  that  of  government  produc- 
tion. There  is  a  similar  absence  of  uniformity  in  practice  in 
regard  to  all  those  industries  which  involve  large  public  interests 
for  the  conservation  of  which  there  is  under  private  management 
no  good  guarantee.  In  some  cases,  as  the  water-supply,  there 
is  a  general  tendency  in  the  direction  of  public  ownership. 
Whenever,  as  in  this  case,  a  pubHc  interest  is  absolutely  para- 
mount to  every  other  consideration,  there  is  little  attempt  to 
make  the  industry  a  source  of  revenue  beyond  what  is  necessary 
to  maintain  the  service.  These  industries,  therefore,  tend 
rapidly  to  be  supported  by  fees  or  taxes.  Inasmuch  as  it  is 
generally  the  importance  of  the  public  interest  that  led  to  the 
assumption  of  the  industry  by  the  government,  this  tendency 
is  universal.  Roads,  canals,  the  water-supply,  the  post-office, 
telegraph,  telephone,  and  the  railroads  all  pass  more  or  less 
rapidly  through  these  stages  according  to  the  importance 
ascribed  to  the  public  interest  in  them.  As  already  seen,  the 
post-office  is  now  primarily  supported  by  fees.  The  funds  for 
the  support  of  water  works  are  generally  collected  from  the 
users,  as  fees,  or  from  certain  classes  of  persons  as  special  taxes, 
but  seldom  as  prices  for  the  service.  The  experience  of  nations 
with  State-owned  railroads  is  too  recent  and  too  varied  to  be 


FEES   AND  INDUSTRIAL   EARNINGS  339 

very  instructive.  States  have  been  led  into  the  ownership  and 
operation  of  railroads :  first,  because  the  roads  needed  the  sup- 
port of  public  credit ;  second,  because  of  military  interests ; 
third,  because  of  the  failure  of  private  companies  to  protect 
public  interests.  Railroads  have  more  often  been  a  source  of 
public  expenditure  than  of  public  revenue.  In  Prussia  alone 
have  the  financial  results  been  such  as  to  add  materially  to  the 
income  of  the  treasur}-.  The  question  of  government  owner- 
ship of  railroads  is  one  involving  considerations  broader  than 
merely  fiscal  ones,  and  does  not  properly  belong  to  our  subject. 
In  no  case  is  it  at  all  likely  that  merely  fiscal  considerations 
will  have  more  than  a  deterrent  effect  upon  the  solution  of  the 
problem  of  the  government's  action  in  regard  to  the  manage- 
ment of  the  railroads. 

While  the  industrial,  commercial,  or  other  economic  func- 
tions of  the  State  are  of  continually  growing  importance,  they 
are  not  likely  to  be  largely  a  source  of  net  revenue.  No- 
where do  we  find  principles  that  would  lead  us  to  anticipate 
that  revenues  of  this  character  will  ever  supply  the  place  of 
taxes.  Indeed,  if  the  usual  evolution  continues,  these  functions 
may  be  performed  by  the  State  without  a  special  charge  upon 
the  benefited  persons,  and,  while  the  liberties  of  the  people 
in  respect  to  the  enjoyment  of  these  facilities  will  be  greater,  the 
burden  thrown  upon  general  taxation  will  be  equally  so.  If  a 
city  now  supplies  a  sewer  system  to  citizens  free  of  special 
charge  except  for  first  construction,  it  may  with  the  same  logic 
supply  water.  If  a  State  furnishes  roads  at  common  cost,  it 
may  certainly  so  far  modify  the  management  of  railroads  as  to 
apply  the  fee  system  and  forego  the  collection  of  any  surplus, 
though  in  this  case,  as  in  that  of  the  post-office,  there  would 
seem  to  be  as  yet  no  sign  of  any  tendency  to  go  beyond  the  fee 
system. 


PART    III 

PUBLIC    INDEBTEDNESS 

CHAPTER  I 
THE   GROWTH  AND   NATURE   OF  PUBLIC   CREDIT 

Section  i.  Size  of  Public  Debts.  —  The  national  govern- 
ments of  the  civilised  world  owed  in  1908- 1909  more  than 
thirty-six  and  one-half  thousand  millions  of  dollars,  or  seven 
and  one-half  thousand  million  pounds  sterling.  With  the 
addition  of  the  debts  owed  by  the  local  governments  this  sum 
will  exceed  forty  thousand  millions  of  dollars,  or  eight  thousand 
million  pounds.     The  nearest  available  figures  are : 


National  debt  of  all  countries,  1890 
National  debt  of  all  countries,  1908 


$27,524,976,915! 
36,548,455  489 


According  to  the  best  available  authorities  the  national  indebted- 
ness of  the  world  increased  fourfold  between  1848  and  1890, 
and  by  1908  it  was  fivefold. 


Years 

Aggregate  Debt 

Increase 

Per  Cent 
OF  Increase 

1848 
i860 
1870 
1880 
1890 
1908 

$  7,637,692,215 
10,399,341,688 
17,117  640  428 
27,421,037,643 
27,524,976,915 
36,548  455,489 

$  2,771  649,473 

6,718,298,740 

10,303,397,215 

103,939,272 

9,023,478,574 

36.34 
64.60 
60.19 
•38 
32.80 

[From  best  available  sources.] 

1  Bastable,  in  his  edition  of  igo3,  says  that  the  total  of  national  debts  can  hardly 
have  been  less  than  £7,000,000,000  at  the  close  of  the  nineteenth  century  (p  626). 

340 


THE   GROWTH  AND   NATURE    OF   PUBLIC    CREDIT      341 

The  increase  of  national  indebtedness  between  1880  and  1890 
was  comparatively  slight.  But  this  was  partly  due  to  the  pay- 
ment of  a  large  part  of  the  national  debt  of  the  United  States. 
The  increase  since  1890  is  largely  attributable  to  the  Boer  War 
in  England  and  to  the  Spanish- American  War.  Other  countries 
have  continued  the  process  of  debt-making  —  although  less 
rapidly,  owing  to  the  continuance  of  peace.  The  above  figures 
do  not  include  pensions,  which  are  really  debts  in  the  form  of 
annuities.^ 


Reported  National  Debt  of  Specified  Nations  for  the  Fiscal  Year, 

1904-1905 


Country 


Austria  .  .  . 
Hungary  .  .  . 
Austria-Hungary 
Belgium  .  .  . 
Bulgaria  .  .  . 
Denmark  .  . 
France  .  .  . 
Germany  .  .  . 
Greece  .  .  . 
Italy  .... 
Netherlands  .  . 
Norway  .  .  . 
Portugal  .  .  . 
Roumania  .  . 
Russia  .  .  . 
Servia  .... 
Spain  .... 
Sweden  .  .  . 
Switzerland  .  . 
Turkey  .  .  . 
United  Kingdom 
United  States  . 
China  .... 
Japan   .... 


Per 

Population 

Total  Debt 

Capita 
Debt 

26,150,710 

$  785,243,792 

$  30 

19,254,560 

1,069,067,854 

56 

45405,270 

1,095,606,825 

24 

7,074,910 

606,762,617 

86 

3,744,280 

66,162,890 

18 

2,464,770 

65,269,644 

26 

38,961,950 

5,929,395,672 

152 

60,605,180 

823,290,138 

14 

2,433,800 

164,001,050 

67 

33,476,120 

2,424,448,935 

72 

5,509,660 

464,246,824 

84 

2,240,100 

71,657,217 

32 

5,423,130 

855,114,614 

158 

6,400,000 

264,723,487 

41 

129,309,300 

3,738,394,688 

29 

2,676,990 

89,736,313 

34 

18,618,100 

1,858,191,268 

100 

5,260,810 

103,803,418 

20 

3,425,380 

19,798,382 

6 

24,028,900 

537,767,716 

22 

43,218,000 

3,877,318,133 

90 

81,511,815 

989,866,772 

12 

407,253,000 

587,654,208 

I 

46,732,200 

483,942,912 

10 

For  later  figures  see  appendix  to  this  chapter. 

1  If  these  were  included  and  capitalised  at  ten  years'  purchase,  which  would,  per- 
haps, lje  a  fair  average,  they  would  add  to  the  debt  of  the  United  States  at  least 
$i,50o,cxx),ooo. 


342  INTRODUCTION  TO  PUBLIC  FINANCE 

The  table  on  the  preceding  page  compiled  from  the  States- 
man's Year  Book  for  1906  gives  the  details  of  the  population, 
indebtedness,  and  per  capita  debt  on  the  account  of  the  national 
governments  only,  of  twenty-four  of  the  most  important  nations. 
The  totals  for  the  British  Empire  were :  population  325,540,000, 
total  indebtedness  $7,190,748,566  (£1,440,000,000),  per  capita 
$22  (£4  10s.). 

While  the  absolute  amount  of  the  debt  has  increased,  the 
burden  has  materially  decreased  since  1880,  owing  to  the  in- 
crease in  population  and  wealth.  In  1880,  the  national  indebted- 
ness of  countries  other  than  the  United  States  amounted  to 
$35.64  per  capita,  while  in  1890  it  was  $32.90  per  capita.  During 
the  same  period  the  national  debt  of  the  United  States  was  re- 
duced absolutely  by  over  a  billion  dollars,  and  relatively  from 
$38.33  per  capita  to  $14.24  per  capita.  The  per  capita  debt 
for  the  world  at  large  on  the  national  accounts  only  was  in  1909 
about  $26,  that  of  the  United  States  in  the  same  year  about 
$10.  Of  course  statistics  of  this  sort  are  neither  perfectly 
accurate  nor  easy  to  interpret.  The  only  proper  comparison 
between  different  countries  would  be  that  of  the  ratio  of  the 
interest  charge  to  the  annual  income  of  the  people.  But  the 
annual  income  is  very  difficult  to  ascertain,  and  the  errors 
would,  probably,  be  so  great  as  to  destroy  the  significance  of  the 
result.  But  the  foregoing  figures,  while  not  absolutely  correct, 
are  sufficiently  so  to  indicate  that  the  policy  of  borrowing  has 
become  a  most  vital  part  of  the  system  of  public  finance.  The 
cause  of  the  national  debts  is  almost  exclusively  war  and  the 
preparation  for  war.  If  the  expenses  of  war  and  its  preparation 
had  been  excluded  from  their  finances  and  the  treasury  relieved 
of  the  subsequent  burden  of  interest,  civiHsed  nations  would 
have  been  easily  able  to  meet  their  current  expenses.  In  Eng- 
land the  annual  public-debt  charges  for  interest  and  debt  pay- 
ments consume  nearly  one-fourth  of  the  annual  revenues  from 
every  source.  The  policy  pursued  by  England  is  to  fix  a  perma- 
nent debt  charge  against  the  annual  revenues  and  to  use  all  that 
can  be  saved  therefrom  over  and  above  the  interest  charges  for 
the  payment  of  the  principal.     This  so-called  sinking  fund 


THE   GROWTH  AND   NATURE   OF  PUBLIC   CREDIT      343 

system  is  suspended  in  time  of  war.  The  funded  debt  of 
France,  the  largest  ever  contracted  by  any  country,  imposed 
an  interest  charge  of  about  1,250,000,000  francs  upon  a  total 
revenue  of  about  3,500,000,000  francs.  If  we  include  certain 
annuities  and  pensions,  over  one-third  of  the  revenues  of  France 
were  consumed  in  this  way,  before  the  Great  War. 

Cash  Reserves.  —  Germany  is  the  only  country  of  importance 
that  did  not  rely  entirely  upon  the  possibility  of  borrowing 
money  in  case  of  war.  That  country  maintained  a  special 
cash  reserve  of  many  millions  in  gold,  available  for  immediate 
appHcation  to  war  purposes,  should  it  be  needed.  Although 
the  German  Empire  began  in  1871  without  debt,  it  had  in  1908  a 
debt  of  1 ,588,000,000  marks.  This  was  largely  due  to  armament. 
So  that,  although  Germany  held  a  cash  reserve  for  military 
purposes,  it  was  practically  a  borrowed  one,  and  she  was  making 
her  preparation  for  war  on  borrowed  money.  This  policy  does 
not  differ  essentially  from  that  of  other  countries.  In  the 
Middle  Ages,  however,  as  in  classical  times,  it  was  the  practice 
of  nations  to  accumulate  a  treasure  for  war  purposes  in  advance, 
by  collecting  more  revenue  each  year  than  was  needed.  This 
practice  is  now  obsolete  and  is  also  indefensible  as  too  costly.^ 

Deficit  Financiering.  —  Modern  nations,  then,  practise  a 
method  of  deficit  financiering.  They  make  provision  in  their 
annual  revenues  for  the  current,  regular,  or  "ordinary"  expendi- 
tures only,  and  rely  for  funds  at  other  times  upon  their  ability 
to  borrow.  What  then  constitutes  this  ability  to  borrow  upon 
which  so  much  reliance  is  placed  that  even  the  very  existence 
of  the  nation  is  allowed  to  depend  upon  it?  Since  when,  and 
how  is  it,  that  nations  have  been  able  to  rely  so  absolutely  upon 
public  credit  ?  The  answer  to  both  these  questions  is  contained 
in  the  analysis  of  public  credit. 

Sec.  2.  Public  Credit  a  Form  of  General  Credit.  —  Public 
credit  is  only  one  form  of  general  credit,  and  it  is  comparatively 
easy  to  point  out  wherein  the  former  differs  from  the  latter. 
But  credit  in  itself  is  by  no  means  easy  to  define.  Scarcely  any 
two  of  the  able  writers  who  have  treated  the  subject  are  agreed 

'  See  Bastable,  p.  567. 


344  INTRODUCTION  TO  PUBLIC   FINANCE 

as  to  its  most  important  features.  It  has,  moreover,  as  a  term 
in  common  use,  suffered  so  many  subtle  changes  in  meaning 
in  the  course  of  its  history  as  to  leave  its  modern  significance 
full  of  dangerous  variations.  The  ordinary  business  man  uses 
the  word  daily  to  convey  half  a  dozen  or  more  different  ideas 
without  recognising  the  differences.  Scientific  writers  have 
waged  long  and  bitter  controversies  concerning  its  proper 
definition. 1  Without  going  too  deeply  into  the  controversy, 
we  may  say  that  there  are  practically  three  opposing  views  as 
to  the  real  nature  of  credit.  First,  there  are  those  writers  who, 
like  Nebenius  and  Rau,  start  from  the  etymological  meaning 
of  the  term  and  maintain  that  the  confidence,  or  trust,  reposed 
by  the  creditor  in  the  ability  of  the  debtor  to  fulfil  an  agreement 
in  the  future  is  the  chief  element  in  credit.-  Second,  there  is 
a  class  of  writers  who,  like  Knies,  regard  this  element  of  con- 
fidence, a  mere  psychical  condition,  as  too  intangible,  too  im- 
material, to  be  of  any  value  for  a  scientific  definition.  They 
proceed  entirely  from  observation  of  those  transactions  which 
are  said  to  involve  the  use  of  credit,  and  find  in  all  such  trans- 
actions one  feature  which  is  never  present  in  transactions  not 
designated  as  credit  transactions.  That  feature  is  that  the 
completion  of  the  transaction  is  regarded  as  being  postponed 
to  a  future  time.  This  element  of  time,  this  postponement, 
must  then,  they  argue,  be  the  essence  of  credit.  Credit  is,  in 
their  eyes,  merely  a  means  of  transferring  ownership  tem- 
porarily, a  means  of  paying  for  present  goods  with  a  greater 
quantity  of  future  ones.  Third,  there  is  still  another  school, 
who,  like  McLeod,  regard  credit  as  analogous  to  money,  money 
being  regarded  as  representing  claims  on  the  wealth  of  the  whole 
community,  while  a  credit  is  a  similar  claim  on  the  wealth  of 
some  particular  individual.  McLeod  even  goes  so  far  as  to 
identify  the  claim,  the  order,  the  promise  to  pay,  or  the  right  to 
demand  with  "  the  credit."  "  A  credit,"  says  McLeod,  "  in 
Law,  Commerce,  and  Economics,  is  the  Right  which  one  Person, 

1  A  good  idea  of  the  extent  of  the  controversy  and  of  the  conflicting  views  can 
be  gained  from  Knies,  Der  Kredit,  Berlin,  1876. 

^Nebenius.  Der  bfentUche  Credit,  Carlsruhe  und  Baden,  2d  ed.,  1829;  Rau, 
Finanzwissensckajt,  3d  ed.,  Heidelberg,  1S51 ;  II  Abt.,  p.  ;:48. 


THE   GROWTH  AND   NATURE   OF  PUBLIC   CREDIT      345 

the  Creditor,  has  to  compel  another  Person,  the  Debtor,  to  Pay 
or  Do  something."  ^ 

Sec.  3.  Reconciliation  of  These  Views.  —  These  definitions, 
apparently  so  contradictory,  are  not  altogether  irreconcilable. 
They  represent  dififerent  points  of  view  rather  than  real  dif- 
ferences in  meaning.  Certainly  nothing  but  credit  is  described 
by  any  one  of  the  three  definitions,  and  certainly  there  are  shades 
of  the  meaning  of  the  term  that  are  aptly  described  by  each  of 
them.  As  is  so  often  the  case  when  a  word  in  common  use  is 
defined  for  scientific  purposes  in  several  ways,  we  find  that  one 
definition  fits  certain  classes  of  things  covered  by  the  term  better 
than  others.  There  are  certain  debts,  for  example,  in  which 
the  element  of  trust  is  paramount,  others  in  which  that  of  time 
is  more  important,  and  again  some  in  which  the  element  of 
claim  or  demand  is  the  distinguishing  thing.  But  it  is  also 
true  that  there  are  no  cases  of  the  existence  of  credit  where  all 
three  of  these  features  do  not  appear,  the  one  or  the  other  varying 
in  importance  as  the  case  may  be.  To  fully  understand  a  thing 
so  many-sided  as  credit,  it  is  necessary  to  examine  it  from  several 
points  of  view. 

If  we  start  from  the  etymological  meaning  of  the  term,  we 
cannot  avoid  the  conclusion  that  one  of  the  chief  elements  of 
credit  is  trust.  Certainly  without  that  intangible,  unmeasurable 
feeling  or  frame  of  mind  known  as  confidence,  trust,  or  faith,  on 
which  Knies  pours  so  much  scorn,  no  debts  would  have  come 
into  existence.  As  Professor  Cohn  well  says,  "  Credit  rests 
on  the  development  of  opinions  and  institutions  which  arise 
with  the  general  advance  of  civilisation."  ^  Modern  usage  has 
not  yet  eliminated  this  original  meaning  from  the  term.     It 

1  Theory  of  Credit,  Vol.  I,  p.  315.  In  a  very  scholarly  article  published  in  the 
Quarterly  Journal  of  Economics,  January,  1894,  Professor  Sherwood  discusses  the 
nature  and  mechanism  of  credit  in  a  way  to  throw  a  great  deal  of  new  light  upon 
the  subject.  I  do  not  believe  that  his  analysis  can  be  improved  upon.  lie  dis- 
tinguishes particularly  the  credit  basis  of  money,  as  generic  or  universal  credit 
(which  he  calls  "customary  credits"),  from  that  of  the  commonly  so-called  credit 
transactions,  which  he  calls  "formal  credits."  It  is  with  the  latter  only  that  we 
are  concerned  here.  They  are  legally  enforciljle.  They  rest  in  the  economic  sense 
"on  a  psychological  trait  of  faith  in  the  uniformity  and  reasonableness  of  other 
men's  voluntary  acts." 

''  Grundiegung,  p.  553. 


346  INTRODUCTION  TO  PUBLIC  FINANCE 

cannot  be  altogether  incorrect  to  make  this  a  part  of  the  defi- 
nition. It  is  customary  enough  to  conceive  that  credit  or  faith 
is  reposed  by  the  creditor  in  the  debtor,  and  that  it  varies  in 
amount,  although  never  exactly  measurable.  But  there  are 
many  credit  transactions  in  which  the  element  of  trust  shrinks 
into  insignificance.  An  advance  on  a  warehouse  receipt,  a  Lom- 
bard loan,  a  pawnbroker's  advance,  all  of  these  and  many  like 
them  are  credit  transactions,  but  the  element  of  personal  con- 
fidence plays  little  part  in  these.  The  creditor  in  these  cases 
never  has  to  consider  the  character  of  the  debtor  nor  his  ability  or 
willingness  to  pay.  After  he  has  satisfied  himself  as  to  the  value 
of  the  security,  all  that  he  has  to  consider  is  the  time  the  debt 
has  to  run.  It  must  be  admitted,  then,  that  there  are  a  number 
of  cases  of  credit  transactions  in  which  the  paramount  element 
is  that  of  time.  The  first  two  of  the  above-stated  views  of  the 
nature  of  credit  are,  therefore,  reconcilable  in  this  way.  They 
may  be  regarded  as  essentially  the  same  with  a  difference  in  the 
emphasis,  and  it  is  correct  to  change  the  emphasis  when  dif- 
ferent kinds  of  debts  are  considered.  Both  of  them  may  be 
covered  by  one  definition,  which  may  for  two  reasons  be  called 
the  subjective  definition  :  (i)  because  it  takes  into  consideration 
feehngs,  opinions,  i.e.  trust,  confidence,  behef ;  (2)  because  it 
looks  at  credit  from  the  natural  point  of  view  of  the  creditor 
who  entertains  that  trust. 

Subjective  Definition.  —  From  the  subjective  standpoint  credit 
is  the  confidence  or  trust  reposed  by  one  person  in  the  ability 
of  some  other  person  to  fulfil  a  promise  at  some  future  time. 
The  emphasis  will  fall  upon  the  feature  of  trust  or  upon  that  of 
time  according  to  the  nature  of  the  particular  debt  in  point. 

But  that  is  not  all :  we  have  yet  to  dispose  of  that  view  which 
identifies  credit  with  the  claim  which  the  creditor  has  on  the 
debtor.  In  one  aspect  this  view  seems  absolutely  contradic- 
tory to  that  which  we  have  adopted.  So  much  so  that  Knies 
ridicules  it,  considering  it  quite  as  absurd  as  the  reasoning  of 
John  Law.  He  says  it  makes  the  debtor  give  credit :  i.e.  he 
gives  the  claim,  and  the  claim  is  credit.  But  McLeod's  reason- 
ing is  not  so  easily  disposed  of.     He  has  taken  what  may  be 


THE   GROWTH   AND   NATURE   OF   PUBLIC   CREDIT      347 

well  Galled  the  objective  view.  He  has  sought  out  embodied 
credit.  His,  too,  is  the  natural  point  of  view  of  the  debtor. 
The  opposition,  therefore,  between  the  two  views  is  more 
apparent  than  real,  and  arises  from  the  fact  that  each  is  from  a 
different  point  of  view.  There  are  two  sides  to  the  shield.  The 
debtor  sells  a  claim  (a  chose  in  action)  which  is  a  more  or  less 
tangible  thing  having  a  present  value,  just  as  many  another 
right  has ;  as,  for  example,  a  patent  right  or  a  copyright.  The 
debtor  is  concerned  only  with  the  value  of  that  claim.  The 
creditor,  however,  looks  beyond  the  claim  and  desires  to  know 
whether  he  can  trust  in  the  abiUty  of  the  debtor  to  make  the 
claim  good.  By  a  very  natural  analogy,  too,  the  language  of 
business  says  that  the  debtor  enjoys  good  or  bad  credit,  as 
though  the  trust  reposed  in  him  by  others,  in  whose  minds  it 
exists,  really  became  an  attribute  of  him.  There  is  still  more 
ground  for  McLeod's  view,  for,  as  has  already  been  remarked, 
it  is  often  the  nature  of  the  claim  created  that  adds  to,  or  de- 
tracts from,  the  credit.  Any  man,  in  ordinary  times,  can  obtain 
credit,  if  he  comes  prepared  with  collateral  security  and  is 
ready  to  create  a  claim  that  is  good  on  that  in  case  his  other 
resources  fail  him.  It  is  clear,  then,  that  the  view  of  McLeod 
is  important,  and  also  that  it  is  supplementary  to  that  already 
adopted.  It  reveals  many  phases  of  credit  that  cannot  be  seen 
at  all  from  the  subjective  point  of  view.  The  two  views  taken 
together  make  a  complete  explanation. 

Objective  Definition.  —  From  the  objective  standpoint,  credit 
is  embodied  in  claims  which  are  accepted  by  the  creditor  in  pay- 
ment. These  objective  claims  have  a  value  like  every  other 
exchangeable  commodity,  and  are  recorded  in  the  various 
"  instruments  of  credit." 

Public  Credit  and  Private  Credit  Differ.  —  If  these  two  defi- 
nitions are  accepted,  we  can  proceed  to  point  out  wherein  public 
credit  differs  from  ordinary  or  private  credit.  The  peculiar 
conditions  which  distinguish  public  credit  from  ordinary  credit 
arise  from  the  fact  that  the  debtor  is  the  State.  The  State,  be- 
ing above  the  law,  cannot  be  compelled,  as  the  private  individ- 
ual can,  to  pay  its  debts.     Puljlic  credit  is  therefore  subjectively 


348  INTRODUCTION  TO  PUBLIC   FINANCE 

defined  as  the  confidence  or  trust  reposed  in  the  abihty  and 
wilHngness  of  the  debtor  (the  State)  to  fulfil  its  promises  at  some 
future  time.  Objectively  the  claim  (in  this  case  the  bond) 
shrinks  to  the  character  of  an  unsupported  although  generally 
accepted  promise.  There  are,  to  be  sure,  some  important  cases 
in  which  the  claim  is  apparently  supported  by  something  more 
definite  than  the  mere  promise  of  the  debtor ;  as,  for  example, 
when  the  revenues  from  certain  productive  enterprises  are 
pledged  for  the  support  of  the  debt  charges.  But  even  in  these 
cases,  the  creditor  has  no  real  resource  against  intentional  bad 
faith.  In  general  the  subjective  standpoint  gives  a  better 
view  of  public  credit  than  the  objective,  because  the  claims 
cannot  be  enforced. 

The  fact  that  the  debtor  is  the  State  has  other  important 
consequences,  (i)  The  State  has  sovereign  power  and  can  com- 
pel its  subjects  to  lend  to  it ;  or,  on  the  other  hand,  the  creditor 
may  make  advances  on  rather  poorer  terms  than  he  would 
otherwise  accept,  from  motives  of  patriotism.  (2)  The  debtor 
State  lives  forever,  and  hence  can  make  perpetual  debts.  (3)  Its 
affairs  are  all  open  to  inspection,  and  the  would-be  creditor  has 
full  opportunity  to  know  its  ability  to  pay.  (4)  Public  credit 
may  be  divided  into  various  parts,  according  as  it  is  the  credit 
of  the  central  government  or  of  some  subordinate  department 
that  is  being  considered.  The  consideration  of  the  relations 
of  the  different  parts  of  the  government  in  this  respect  belongs 
to  the  field  of  public  law  rather  than  to  that  of  public  finance. 

Sec.  4.  The  Late  Development  of  Public  Credit.  —  Public 
credit  was  necessarily  later  in  development  than  private  credit. 
General  habits  of  lending  on  a  large  scale  had  to  be  established 
before  nations  could  borrow.  The  bankers  and  brokers  of  the 
world  had  to  develop  the  machinery  for  handling  evidences  of 
debt  before  large  public  loans  could  be  placed.  Then,  too, 
inasmuch  as  the  objective  evidences  of  debt  in  the  case  of  the 
government  were  nothing  but  the  unsupported  promises  of  the 
government,  confidence  that  these  promises  would  be  kept  had 
to  grow.  At  first  the  assurance  rested  on  the  honour  of  the 
monarch,  or  upon  some  pledge  or  security  given  by  him,  such 


THE  GROWTH  AND  NATURE  OF  PUBLIC  CREDIT      349 

as  the  crown  jewels,  crown  lands,  a  lease  of  the  revenues,  and  the 
like.  But  later,  as  Bastable  so  ably  shows,^  the  development  of 
public  credit  goes  hand  in  hand  with  the  development  of  con- 
stitutional government.  It  would  seem  that  the  control  of 
the  purse  by  the  very  persons  who  were  to  pay  the  taxes  gave  a 
steadiness  and  security  to  the  financial  administration  that 
aroused  the  confidence  of  money  owners. 

Sec.  5.  Economic  Effect  of  Debt.  —  Much  attention  has  been 
given  by  different  authors  to  the  economic  effects  of  public 
borrowing.  It  is  now  pretty  well  agreed  that  public  borrowing 
does  not,  as  was  once  taught,^  create  new  wealth  except  in- 
directly, through  the  use  made  of  the  capital  taken  when  it  is 
used  productively.  Nor,  on  the  other  hand,  does  public  bor- 
rowing in  itself  directly  destroy  wealth.  The  money  borrowed 
may  be  devoted  to  some  form  of  rapid  consumption,  as  in  war. 
In  this  case  the  destruction  of  wealth  is  determined  by  the  line 
of  expenditure  decided  upon,  not  by  the  borrowing  merely. 
But  the  feasibility  of  obtaining  large  sums  in  this  way  is  said 
to  lead  to  more  extravagant  expenditure  than  would  otherwise 
be  indulged  in,  since  taxation  for  such  purposes  would  be  diffi- 
cult. The  consumed  wealth  is  replaced  by  claims  upon  future 
wealth  which  are  not  of  such  a  character  as  to  be  available  as 
productive  capital.  But  the  loss  incurred  is  distributed  over 
many  years  instead  of  being  concentrated  in  a  few.  As  in  the 
case  of  a  spendthrift  who  mortgages  his  patrimony  for  wasteful 
extravagance,  so  in  the  case  of  a  nation  which  borrows  for  war, 
the  evil  that  arises  is  from  the  waste  of  war,  not  from  the  bor- 
rowing. For  a  State  to  borrow  for  a  productive  purpose  has 
no  other  economic  effect  than  for  a  private  corporation  to  do  the 
same. 

Sec.  6.  Foreign  vs.  Domestic  Loans.  —  There  has  also  been 
some  discussion  of  the  relative  merits  of  domestic  and  foreign 
loans  and  their  differing  economic  effects.  Sometimes  it  has 
been  claimed  that  foreign  loans  involve  less  disturbance  of 
domestic  industry.  The  intimate  relation  existing  between 
modern  nations  in  their  commercial  and  industrial  enterprises 
*  P-  579-  *  "The  public  funds  a  mine  of  gold." 


350  INTRODUCTION   TO   PUBLIC   FINANCE 

destroys  to-day  almost  all  the  significance  that  might  formerly 
have  attached  to  such  a  discussion.  The  payment  of  the 
French  indemnity  of  5,000,000,000  francs  to  Germany  after 
the  war  of  1870  was  carried  out  in  twenty-seven  months,  and 
not  one  single  serious  difficulty  or  disorder  in  the  financial 
centres  was  produced  by  it.^  So  great  is  the  mobility  of  modern 
capital  and  so  vast  are  the  current  transactions,  that  all  of  this 
money  could  be  easily  turned  into  the  same  stream  without 
disturbing  its  placid  surface.  The  only  point  of  importance  is 
that  a  home  debt  is  under  the  taxing  power  of  the  nation,  while 
a  foreign  debt  is  less  so.  This  makes  possible  an  easier  adjust- 
ment without  the  full  stigma  of  repudiation. 

The  Frailty  of  Public  Credit.  —  Public  credit  is  a  plant  of  slow 
growth ;  more  than  that,  it  is  a  delicate  plant.  It  may  be 
injured  beyond  recovery  by  a  single  case  of  failure  to  fulfil  the 
promise  in  which  it  found  expression.  Many  of  the  common- 
wealths of  the  United  States  have  repudiated  their  debts,  and 
have  since  then  recovered  their  power  to  borrow  but  slowly, 
and  in  some  instances  scarcely  at  all."  Weak  nations  which 
may  be  or  have  been  coerced  by  stronger  and  wealthier  nations 
in  the  interest  of  citizens  of  the  latter  who  were  creditors  of  the 
former,  generally  borrow  more  easily  than  stronger  independent 
nations,  or  parts  of  strong  confederations,  which  have  failed  to 
meet  their  obligations  and  cannot  be  coerced. 

The  credit  of  local  governing  bodies  depends  in  great  measure 
upon  their  powers  and  duties  in  public  law.  Generally  speak- 
ing, a  "  municipal  corporation,"  when  acting  legally  within  the 
sphere  prescribed  to  it,  is  like  a  private  company,  —  its  obliga- 
tions can  be  enforced  by  legal  or  judicial  procedure.  Unlike 
the  sovereign  State,  a  municipality  can  be  sued  without  its 
consent.  Only  with  the  positive  sanction  of  the  sovereign 
State  can  a  municipality  default  and  escape  punishment  therefor. 

1  Blackwood's  Edinburgh  Magazine,  February,  1875,  pp.  172-187. 

2  Under  the  Eleventh  Amendment  to  the  federal  Constitution,  a  state  cannot 
be  sued  in  a  federal  court.  This  is  contrary  to  the  original  intention  of  the  Con- 
stitution. See  my  monograph,  Das  Kreditwesen  der  Staaten  iind  Stadte  dcr  Nord- 
amerikanischen  Union  in  seiner  historischen  Enhvickelung,  Jena,  1891.  Egypt  is 
a  good  example  of  foreign  coercion  to  enforce  debt  payment. 


APPENDIX  TO   CHAPTER   I,   PART   III 
PUBLIC    DEBT    AND    THE    WORLD    WAR 

The  following  tables  are  from  a  pamphlet  by  Louis  Ross 
Gottlieb,  on  the  Financial  Status  of  Belligerents,  published  by 
the  Bankers  Trust  Company,  New  York,  1920. 

SUMMARY   OF    PUBLIC    DEBTS    OF    PRINCIPAL 

BELLIGERENTS 

(Million  dollars) 

A.    Allied  Powers 


Country 


United  States 
Great  Britain 
Canada  .     . 
Australia 
New  Zealand 
France    .     . 
Italy  .     .     . 
Japan      .     . 
Russia     .     . 
Belgium 
Greece    .     . 

Total    . 


Popula- 
tion' 
(thou- 
sands) 


106,653 

46,089 

8,361 

4,971 

1,162 

39,700 

36,717 

57,998 

182,18s 

7,658 

4,950 


496,442 


Before  Entering  the  War 


Date 


Mar.  31, 
Aug.  I, 
Mar.  31, 
June  30, 
Mar.  31, 
July  31, 
June  30, 
July  31, 
Jan.  1, 
Jan.  I, 
Dec.  31, 


1917 
1914 
1914 
1914 
1914 

1914 
1914 
1914 
1914 
1914 
1913 


Annual 

Debt 

Debt 

debt 

per 

charges 

capita 
(dollars) 

1,208 

23 

11-33 

3,458 

119 

7S-03 

336 

13 

40.19 

93 

3 

18.71 

446 

13 

383-82 

6,598 

252 

166.20 

3,031 

103 

82.SS 

1,261 

54 

21,74 

5,092 

218 

27-95 

722 

25 

94-28 

188 

8 
831 

37-98 
45-19 

22,433 

Debt 

charges 

per 

capita 

(dollars) 


0.22 
2.58 

i-SS 

0.60 

II. 19 

6-35 
2.81 

0.93 
1.20 
3-26 
1-62 


1.67 


B.    Central  Powers 


Germany  .  . 

Austria   .  .  . 

Hungary  .  . 

Turkey   .  .  . 

Bulgaria  .  . 

Total  ■  .  ■ 
Grand  Total 


67,812 
30,958 
21,410 
21,274 
5,518 


146,972 


643,414 


Oct.      I, 

Aug.  1, 
Aug.  I, 
Mar.  31, 
July   .. 


1913 
1914 

1914 
1914 
1914 


1,165 

42 

17.18 

2,631 

lOI 

84-99 

1,602 

53 

74-82 

667 

45 

31-35 

171 

8 

30.99 

6,236 

249 
1,080 

42-43 
44-56 

28,669 

0.62 
3.26 
2.48 

3.13 

1-45 

1.69 
1.68 


351 


35^ 


INTRODUCTION  TO  PUBLIC   FINANCE 


SUMMARY   OF    PUBLIC    DEBTS    OF  PRINCIPAL 
BELLIGERENTS 

"(Million  dollars) 

A.    Allied  Powers 


At  Most  Recent  Date 

Country 

Annual 

Debt 

Debt 
charges 

Date 

Debt 

debt 

per 

per 

charges 

(dollars) 

capita 
(dollars) 

United  States    .... 

Aug.  31,  1919 

26,597 

894 

249.38 

8.38 

Great  Britain 

July    26,  1919 

37,657 

1,421 

817.04 

30.83 

Canada    .     . 

Mar.  31,  1919 

1,584 

"5 

189.4s 

13. 75 

Australia 

Dec.   31,  1918 

1,619 

SO 

325-69 

10.06 

New  Zealand 

Mar.  31,  1918 

734 

22 

631-67 

18.93 

France 

Mar.  31,  1919 

30,494 

1,930 

768.11 

48.61 

Italy    .     .     . 

May  30,  1919 

15,009 

577 

408.78 

15-71 

Japan  .     .     . 

Mar.  31,  1919 

1,284 

52 

22.14 

0.90 

Russia      .     . 

Aug.  31,  1919 

54,402 

766 

298.61 

4.20 

Belgium   .     . 

April    I,  1919 

1,889 

8s 

246.67 

11.10 

Greece     .     . 

Mar.  31,  1919 

521 

18 

105.25 
346.04 

3.64 

Total    .     . 

171,790 

5,930 

11.9s 

B.    Central  Powers 


Germany 

Austria 

Hungary 

Turkey 

Bulgaria 

Sept.  30,  1919 
Oct.    31,  1918 
Oct.    31,  1918 
Aug.  31,  1918 
Mar.  .  .    1919 

40,007 

17,071 

8,909 

2,002 

1,158 

2,201 

622 

347 

88 

109 

58997 
551-42 
416.11 
94.11 
209.86 

32.46 
20.09 
16.21 
4.14 
I9-7S 

Total 

69.147 

3,367 

470.48 
374-47 

22.91 

Grand  Total  .... 

240,937 

9,297 

14.45 

CHAPTER   II 
FORMS   OF  PUBLIC   DEBTS 

Section  i.  Forms  Many.  —  Government  borrowing  takes 
on  many  forms.  Among  the  more  common  are :  (i)  circulating 
notes  or  paper  money  not  bearing  interest ;  (2)  unpaid  accounts, 
most  often  represented  by  warrants,  which  are  orders  upon  the 
treasurer  to  pay  money  and  which  do  not  ordinarily,  but  may, 
bear  interest ;  (3)  short  time  notes,  bearing  interest ;  (4)  long 
time  notes,  bonds  or  annuities,  sometimes  called  generically 
stocks  (British)  or  rentes  (French),  but  in  the  United  States 
always  called  bonds. 

Paper  Money.  —  Circulating  notes  issued  by  governments 
to  pay  their  obligations  may  be,  on  their  face,  redeemable  or 
irredeemable.  When  not  specifically  redeemable  there  is  still 
an  understanding,  or  at  least  a  hope,  that  when  the  difficulties 
which  caused  their  issue  are  overcome  they  will  be  redeemed. 
On  the  other  hand  notes  technically  redeemable  may  never 
be  redeemed.  Irredeemable  notes  are  usually  issued  only  as  a 
desperate  resort  in  times  of  great  stress.  Redeemable  circu- 
lating notes  are,  however,  often  issued  in  the  regular  course  of 
business,  especially  when  the  government  is  regularly  in  the 
banking  business,  or  they  may  be  issued  as  were  the  United 
States  gold  and  silver  certificates,  in  part,  to  meet  the  con- 
venience of  the  people,  and  as  a  regular  part  of  the  circulating 
medium. 

Warrants.  —  Governments  like  individuals  carry  open  book 
accounts  showing  that  they  owe  money  to  certain  firms,  com- 
panies, or  individuals.  In  so  far  as  these  are  current  and  are 
settled  at  regular  intervals  or  as  soon  as  they  can  be  closed  and 
paid,  these  are  not  ordinarily  regarded  as  debts.  Still  more 
2A  353 


354  INTRODUCTION  TO  PUBLIC   FINANCE 

important  are  accruing  salaries ;  for  government  expenses  are 
very  largely  salaries.  When  a  "  claim,"  as  it  is  usually  called 
in  the  United  States,  matures  under  any  running  or  other  open 
account,  or  a  salary  payment  becomes  due,  it  is  usual  for  the 
proper  disbursing  officer  to  issue  a  warrant  directing  the  treas- 
urer to  pay  the  amount  of  the  approved  claim  or  salary.  Such 
a  warrant  is  presumed  to  be  a  settlement  of  the  claim  or  to  be  a 
payment  of  salary,  and  must  usually  per  force  be  accepted  as 
such  by  the  claimant.  If  there  are  funds  in  the  treasury  the 
warrant  is  practically  a  check  or  draft  and  is  treated  by  the  banks, 
and  hence  in  all  other  business  circles,  exactly  as  a  check  or  draft 
would  be  treated.  But  if  the  treasury  is  empty,  temporarily 
or  for  a  considerable  time,  the  warrant  becomes  distinctly  an 
outstanding  evidence  of  debt.  As  funds  flow  into  the  treasury 
outstanding  warrants  will  be  accepted  and  paid  presumably 
in  order  of  presentation,  although  sometimes  certain  classes  of 
warrants  are  given  precedence.  Thus  salary  warrants  may  be 
given  precedence.  The  value  of  a  warrant  depends  upon  the 
length  of  time  that  will  probably  elapse  before  it  will  be  paid. 
That  is,  unless  the  treasury  is  in  position  to  pay  it  at  once  on 
presentation,  a  warrant  is  subject  to  discount.  Sometimes  the 
government  itself  assumes  this  discount  or  loss  and  in  that  case 
the  warrant  would  be  stamped,  or  indorsed  "  interest  pay- 
able until  redeemed."  Such  interest-bearing  warrants  become 
virtually  notes. 

The  use  of  warrants  to  meet  claims  largely  in  excess  of  funds 
on  hand  is  a  loose,  and  undignified,  way  of  doing  government 
business.  It  betokens  a  dangerous  condition  of  perennial 
deficit.  Furthermore  many  claimants  unaccustomed  to  the 
use  of  warrants  are  loath  to  accept  them.  Where  purchases 
are  to  be  made  in  the  open  market  sellers  may  not  come  forward 
at  all  unless  they  are  offered  cash.  In  other  words,  warrants 
cannot  be  used  to  pay  bills  unless  the  claimant  is  willing  or  can 
be  compelled  to  accept  them.  Ordinarily  an  officer  or  employee 
of  the  government  has  little  choice  in  the  matter  once  he  has 
taken  office  or  employment.  So  too  in  time  of  war,  quarter- 
masters, commissary  officers,  and  some  others  take  what  goods 


FORMS   OF   PUBLIC   DEBTS  355 

an  army  needs  and  pay  for  them  in  requisitions  or  orders  which 
are  to  all  intents  and  purposes  much  like  warrants.  But  still 
cash  is  also  needed  to  facilitate  business  for  which  the  warrant, 
requisition,  or  order  is  not  adapted.  Even  an  army  may  obtain . 
goods  for  cash  which  it  would  never  discover  by  search  and 
seizure.  Hence  governments  issue  or  sell  notes,  or  promises 
to  pay,  in  the  open  market  to  get  the  cash  they  need. 

Treasury  Bills.  — Taxes  do  not  always  come  into  the  treasury 
in  a  regular  stream,  but  often  at  fixed  times  once  or  twice  a 
year;  and  if  the  government  is  not  in  position  to  carry  a  cash 
balance  it  may  desire  to  raise  money  temporarily  to  tide  over  the 
intervals.  In  time  of  war,  also,  or  in  other  times  of  stress 
money  may  be  needed  for  covering  expenses  in  the  intervals 
between  tax  receipts  or  returns  from  sale  of  bonds.  The  usual 
device  for  meeting  this  situation  is  the  treasury  bill  or  ex- 
chequer bill.  The  name  implies  that  this  is  a  promissory  note 
or  an  obligation  of  the  treasurer  or  of  the  treasury  department 
and  the  government  is  not  ex  nomine  obligated  thereby.  But, 
of  course,  the  government  stands  behind  and  will  uphold  the 
treasurer  or  the  exchequer.  The  officer  technically  responsible 
for  the  note  or  bill  cannot  legally  become  so  without  authority 
and  acts  strictly  in  an  official  capacity.  In  times  of  peace 
these  notes  are  for  a  short  time  only,  and  may  bear  a  ver>^  low 
rate  of  interest.  They  may  even  be  one-day  notes  or  payable 
on  demand  and  the  treasury  may  depend  upon  its  ability  to  sell 
new  ones  at  any  time,  to  meet  those  which  may  be  presented, 
or,  which  is  often  the  case,  pays  just  enough  interest  to  insure 
that  the  holder  will  find  it  to  his  advantage  to  hold  them,  or,  if 
he  must  realise  on  them,  can  sell  them  to  some  one  else  for  more, 
a  trifle  more  is  enough,  than  he  could  get  from  the  treasury. 
A  not  uncommon  procedure  is  to  discount  such  notes  in  series 
so  that  only  a  certain  amount  falls  due  on  any  one-day.  Where 
there  is  a  bank,  or  a  system  of  banks,  closely  related  to  the  gov- 
ernment the  handling  of  such  notes  is  greatly  facilitated.  The 
secret  of  the  facility  with  which  such  notes  are  handled  in 
ordinary  times  is  found  in  the  existence  of  large  private  funds 
or  many  small  ones  seeking  temporary  investment.     A  business 


356  INTRODUCTION  TO  PUBLIC   FINANCE 

man  or  firm  often  has  cash  on  hand  preparatory  perhaps  to 
reinvestment,  or  funds  accumulating  for  some  definite  purpose 
and  not  needed  at  once.  It  is  an  advantage  to  put  these  funds 
into  treasury  notes  because  of  the  interest  paid  even  though 
the  interest  be  not  high,  for  the  notes  are  very  readily  turned 
back  into  cash,  by  sale  in  the  market  even  if  not  due. 

Treasury  Bills  in  Time  of  War.  —  In  time  of  war  the  treasury 
note  often  becomes  of  great  importance  as  a  means  of  raising 
cash  quickly  even  in  large  amounts.  But  since  an  unforeseen 
demand  for  immediate  payment  on  demand  of  large  sums  on 
any  one  day  might  be  especially  embarrassing,  these  bills  in  war 
times  are  often  issued  for  a  set  term,  and  for  one  longer  than  the 
usual  peace  time  term.  Care  is  often  taken  so  to  date  them 
that  no  overwhelming  mass  shall  fall  due  on  any  one  day.  In 
war  times,  too,  it  is  sometimes  desirable  to  reach  other  possible 
purchasers  than  the  banks  and  men  of  finance.  So  the  treasury 
note  may  be  made  attractive  to  the  general  public.  While 
the  war  time  treasury  note  is  much  the  same  in  nature  as  the 
peace  time  one,  it  is  just  enough  different  in  detail  as  to  make 
it  desirable  to  use  a  different  name  for  it.  So  in  the  United 
States  the  term  treasury  certificate  is  used.  France  used  the 
term  bons  de  la  defense  nationale  for  some  of  hers  during  the  war, 
and  for  another  series  ohligationes  de  la  defense  nationale.  Eng- 
land used  a  variety  of  terms,  among  them  "  war  expenditure 
certificates."  Analogous  to  the  war  treasury  certificates  are 
savings  stamps  and  savings  stamps  certificates,  which  are  a  varia- 
tion of  the  treasury  bill  devised  to  reach  small  savings. 

Sec.  2.  Floating  and  Funded  Debts.  —  Practically  all  of  the 
above  forms  of  public  debts  are  included  under  the  loose  general 
term  floating  debt  to  distinguish  that  part  of  the  debt  from 
the  so-called  funded  debt,  which  consists  of  long-time  obligations, 
in  the  many  forms  explained  below.  It  is  advisable  at  this 
point  to  find  out  if  we  can  what  is  meant  by  floating  and  by 
funded  debt.  Unfortunately  the  distinction  is  not  any  too 
clear  as  the  terms  are  used  to-day,  yet  they  are  very  common 
terms. 

Originally,  this  distinction  was  very  simple,  and  correspond- 


FORMS   OF  PUBLIC   DEBTS  357 

ingly  useful.  In  the  words  of  Adam  Smith :  "  Nations,  like 
private  men,  have  generally  begun  to  borrow  upon  what  may 
be  called  personal  credit,  without  assigning  or  mortgaging 
any  particular  fund  for  the  payment  of  the  debt ;  and  when  this 
resource  has  failed  them,  they  have  gone  on  to  borrow  upon 
assignments  or  mortgages  of  particular  funds."  The  first  of 
these  is  the  unfunded  debt,  the  other  is  the  funded  debt.^  But 
although  these  terms  are  still  in  common  use,  the  meaning 
attributed  to  them  has  so  entirely  changed  that  to-day  the 
so-called  floating  or  unfunded  debt  consists,  in  large  part,  of 
outstanding  claims  upon  very  definite  revenues,  while  it  is 
often  the  case  that  no  particular  fund  or  source  of  revenue  is 
directly  pledged  for  the  payment  of  the  so-called  funded  debt. 
Hence  it  is  that  Professor  Cohn  treats  Smith's  grounds  of  dis- 
tinction as  antiquated,  and  says  that  the  real  distinction  is 
found  in  the  fact  that  the  funded  debts  are  those  of  longer 
duration,  and  the  floating  debts  those  of  shorter  duration, 
"  although,"  he  adds,  "  different  causes  and  purposes  of  credit 
lie  behind  the  difference  in  duration."  -  The  most  elaborate 
attempt  to  explain  the  modern  use  of  these  terms  is  that  of 
Wagner.  As  it  is  so  complete,  it  is  well  worth  summarising  here. 
Funded  and  floating  debts  can  be  distinguished  by  the  following 
characteristics,  which  are  more  or  less  clearly  recognisable  in 
the  different  cases:  (i)  the  purpose  of  the  loan  —  floating 
debts  are  generally  for  rapidly  passing  needs,  especially  for 
the  payment  of  the  current  dues  of  the  treasury  :  funded  debts 
are  to  supply  the  capital  for  permanent  needs  of  the  civic 
household ;  (2)  continuance  of  the  debt  —  together  with  the 
former  characteristic,  relatively  shorter  continuance  of  floating 
debts,  at  least  in  intention ;  longer  continuance  of  funded ; 
(3)  the  legal  conditions  of  repayment  —  in  the  case  of  floating 
debts,  the  different  items  are  repayable  at  sight  or  within  a 
comparatively  short  period ;  in  that  of  the  funded,  the  creditor 
has  a  more  limited  control  over  the  principal,  the  debtor  (the 
State)  being  bound  to  repayment  according  to  a  fixed  plan  for 

1  Wealth  of  Nations,  Bk.  V,  Chap.  III. 
*  Finanzwisscnschaft,  p.  757. 


358  INTRODUCTION  TO  PUBLIC   FINANCE 

amortisation,  or  making  no  agreement  as  to  the  repayment  of 
the  principal.     This  last  is  regarded  as  the  essential  test.' 

The  difhculty  found  in  drawing  a  sharp  line  between  these  two 
classes  arises  from  the  fact  that  the  distinction  is  at  best  purely 
an  arbitrary  one.  It  may  differ  from  state  to  state,  or  from 
time  to  time  in  the  same  state,  according  to  the  temporary  whim 
of  the  public  official  or  statistician.  The  terms  are  relative  ones. 
By  a  floating  debt  is  generally  meant  one  that  is  regarded  by 
the  person  using  the  term  as  a  tem.porary  one.  One  official 
will  call  any  debt  temporary,  or  a  floating  debt,  which  has  three, 
five,  or  even  ten  years  to  run ;  while  another  will  refuse  the 
term  to  any  debt  that  is  to  run  longer  than  six  months  or  a  year. 
Strictly  speaking,  the  term  "  floating  debt  "  ought  never  to  be 
applied  to  any  debt  that  is,  on  the  face  of  it,  to  run  beyond 
the  end  of  the  fiscal  year  next  succeeding  that  in  which  it  is 
created.  But  there  is  no  established  custom  for  such  a  limita- 
tion. In  trying  to  draw  a  sharp  line  between  these  two  classes, 
we  meet  with  the  same  difficulty  that  we  met  in  attempting  to  dis- 
tinguish between  direct  and  indirect  taxes.  But  we  have  even 
less  to  go  upon.  Official,  statutory,  and  scientific  usage  varies 
so  much  that  nothing  is  gained  by  attempting  to  collate  all  the 
meanings.  Even  for  the  most  general  scientific  purposes,  there- 
fore, these  terms  are  of  little  value,  and  for  the  purposes  of 
classification  the  distinction  is  absolutely  useless. 

Sec.  3.  Funded  Debts,  Bonds.  —  Passing  now  to  the  funded 
debts  we  find  great  variety.  Perhaps  the  simplest  form  is  a 
series  of  notes  or  bonds  each  promising  to  repay  a  set  principal 
or  sum  of  money  at  the  end  of  a  term  of  years  and  to  pay  interest 
at  stated  intervals.  As  an  example,  a  city  may  issue  bonds 
for  $1000  each  payable  40  years  from  date  of  issue  with  interest 
at  4  per  cent  per  annum  payable  semi-annually.  There  are 
many  ways  of  varying  the  term.  One  of  the  most  common  is 
for  the  government  to  reserve  the  right  to  redeem  the  bond  after 

1  Most  writers  make  use  of  these  terms ;  few  have  defined  them  so  accurately  as 
Wagner.  For  example,  Adams,  Public  Debts,  p.  147,  concedes  the  term  "floating 
debt"  only  to  those  in  which  the  government  retains  the  right  to  investigate  each 
particular  claim.  This  necessitates  a  new  class  of  "temporary  debts,"  consisting 
of  treasurer's  notes,  bills  of  exchequer,  and  the  like. 


FORMS  OF  PUBLIC  DEBTS  359 

the  lapse  of  a  certain  time  and  also  to  bind  itself  to  do  so  after  the 
lapse  of  a  longer  time.  Thus  we  find  a  bond  payable  or  callable 
after  10  years  and  to  be  paid  in  20  years.  A  common  way  of 
referring  to  such  a  bond  is  to  call  it  a  ten-twenty.  This  means  a 
bond  which  will  be  paid  in  twenty  years  but  is  callable  in  ten 
years.  The  object  of  such  an  arrangement  is  to  insure  the 
lender  a  fixed  term  during  which  his  investment  will  not  be 
disturbed,  and  at  the  same  time  to  give  the  government  a  chance 
at  the  end  of  that  term  to  pay  off  the  obligation  and  relieve 
itself  of  the  burden.  Such  provisions  are  of  great  advantage 
to  the  government  in  refunding  operations.  Thus  if  the  govern- 
ment, owing  to  war  conditions,  has  to  pay  a  high  rate  of  interest, 
but  hopes  after  peace  to  be  able  to  borrow  money  more  cheaply, 
the  right  to  call  in  its  war  bonds  enables  it  to  sell  new  bonds  at 
low  rates  and  with  the  money  to  pay  off  the  old  high  rate  bonds, 
or  what  is  the  same  thing  to  exchange  or  convert  the  old  bonds 
into  new  ones.  Sometimes  the  bonds  are  callable  at  a  date 
prior  to  maturity  in  part  of  the  whole  issue  only.  The  ones 
which  may  be  called  are  so  designated  when  issued,  or  the  selec- 
tion may  be  made  by  lot.  When  a  government  foresees  its 
revenues  it  may  arrange  from  the  start  for  serial  redemption. 
Sometimes  a  government  will  agree  that  if  it  calls  the  bonds 
before  maturity  it  will  pay  a  premium  to  compensate  the 
holder  for  the  inconvenience. 

"  Perpetual  "  Debts.  —  There  is,  however,  no  necessary  reason 
why  a  government  should  fix  a  date  of  redemption  or  name  any 
sum  as  the  principal  sum.  The  government  lives  forever, 
and  its  promise  to  pay  a  fLxed  sum  each  year  forever  ought  to  be 
good.  The  contract  is  eventually  an  annuity.  Such  a  promise 
is  salable  in  the  money  markets  at  any  time.  A  certain  number 
of  them  will  usually  be  offered  for  sale  at  all  times  and  the  gov- 
ernment can  always  step  in  and  buy  them  and  by  so  doing 
reduce  its  debt.  If  the  government  is  in  a  position  to  pay  a 
little  bit  over  market  prices  it  can  almost  certainly  buy  as  many 
as  it  wishes  to  buy.  The  advantage  of  not  naming  a  sum  at 
which  the  government  will  or  may  redeem  an  outstanding  debt 
is  that  the  price  always  represents  the  present  value  of  a  long 


360  INTRODUCTION  TO  PUBLIC  FINANCE 

series  of  annual  payments,  uncomplicated  by  the  computation 
necessary  to  correct  a  premium  or  a  discount  on  the  principal 
payable  at  some  fixed  date.  In  this  way  the  obligation  becomes 
a  public  stock  (English)  or  a  rente  (French)  where  the  attention 
centers  in  the  annual  payment  and  not  on  the  capital  invest- 
ment. This  does  not  necessarily  mean  that  the  security  or 
the  document  may  not  have  a  par  value  entered  or  printed 
upon  it.  For  there  is  a  convenience  in  having  a  face 
value  mentioned,  slight  though  the  convenience  may  be.  It 
facilitates  the  expression  of  the  rate  and  comparison  of  notes 
or  bonds  of  different  sizes.  Thus  a  3^  per  cent  rente  perpetuelle 
may  be  issued  in  denominations  of  100  francs,  500  francs,  1000 
francs  and  larger,  and  may  be  sold  at  98  francs  per  hundred. 
One  statement  of  price  and  rates  of  interest  describes  the  whole 
series  sufficiently  if  the  rente  certificate  bears  a  par  value.  If 
not,  one  would  presumably  have  to  quote  the  securities  as  selling 
at  so  and  so  many  years'  purchase,  which  requires  an  awkward 
computation.  Thus  98  as  par  for  a  ^^  per  cent  rente  perpetuelle 
happens  to  be  28  years'  purchase,  but  other  fractions  are  more 
diflficult.  But  the  point  is  that  unlike  a  bond  (American)  the 
par  value  of  a  "  consol  "  ^  or  any  annuity  is  not  necessarily 
the  sum  which  is  to  be  paid  back  under  a  special  promise. 

Bonds  Used  in  the  United  States.  —  In  the  United  States 
perpetual  annuities,  although  used  in  our  early  history,  are  now 
quite  uncommon,  and  public  bonds  almost  invariably  promise 
to  pay  back  the  principal  at  some  fixed  time.  This  arises  from 
the  practice,  commented  on  several  times,  of  expressing  the 
value  of  investment  properties  on  the  basis  of  capital  value. 
The  European,  unlike  the  American,  thinks  almost  habitually 
in  terms  of  annual  value,  a  concept  quite  troublesome  to  an 
American.  Whether  this  way  of  writing  public  bonds  leads  to 
prompt  liquidation  of  debt  is  an  interesting  problem  in  political 
psychology.  One  thing  is  certain  and  that  is  that  American 
governments  have  paid  their  debts  off  faster  than  European 
governments  have  done  so.     It  may  well  be  that  the  promise  to 

1  "Consol"  is  an  abbreviation  for  "consolidated  debt,"  and  stands  for  the  se- 
curities issued  after  various  conversions  resulting  in  one  standard  series  of  seciurities. 


FORMS  OF  PUBLIC   DEBTS  361 

redeem  at  a  definite  date  has,  by  focussing  attention  on  that 
as  a  goal,  contributed  to  prompt  payment. 

Multiplicity  of  Forms  of  Debts.  —  It  will  readily  be  perceived 
that  there  is  an  almost  unlimited  possibility  of  combinations 
of  the  elementary  forms  described  above,  and  an  almost  infinite 
variety  of  public  stocks  and  bonds  possible.  While  infinity  is 
a  large  number,  the  observer  of  bond  issues  and  other  public 
borrowings  during  the  Great  War  might  well  be  excused  if,  be- 
wildered by  the  large  number  of  different  kinds  issued,  he  con- 
cluded they  were  nearly  infinite.  The  purpose  of  issuing  many 
different  kinds  is  to  meet  the  tastes  and  needs  of  different 
investors.  It  is,  however,  a  matter  of  question  whether  the 
resulting  complexity  is  not  a  serious  mistake.  Two  or  three 
of  the  simpler  sorts  ought  to  be  enough.  In  five  different 
loans  the  United  States  rolled  up  a  very  considerable  number  of 
different  bonds.  Had  she  started  with  a  straight  5  per  cent 
bond  and  stuck  to  that,  selling  at  market  or  at  an  assumed 
market,  varying  only  the  time  of  maturity,  the  simplification 
would  have  been  enjoyable. 

Life  Annuities.  —  A  favorite  variant  of  the  annuity  is  a  life 
annuity.  This  of  course  must  be  sold  on  life  insurance  prin- 
ciples. But  after  the  initial  difficulty  of  fixing  the  payments  is 
overcome,  there  is  an  advantage  to  the  government  arising  from 
the  fact  that  as  the  annuitants  die  the  annual  debt  charge  is 
automatically  decreased.  The  charge  is  higher  at  first  but 
gradually  declines.  Annuities  for  a  fixed  term  of  years  only, 
afford  a  similar  means  of  putting  pressure  on  the  government 
to  reduce  its  debts  by  annual  payments  toward  the  principal. 

Lottery  Loans.  —  Another  variant  is  introduced  by  the  so- 
called  lottery  loans.  These  appeal  to  the  universal  love  of 
gambling  and  may  be  used  to  give  the  government  a  profit, 
or  save  some  money,  much  as  the  "  bank  "  in  any  gambling 
game  takes  its  percentage  through  the  favorable  arrangement  of 
the  chances.  The  forms  of  lottery  loans  are  legion.  Prizes 
may  be  awarded  out  of  interest  or  out  of  principal,  may  take  the 
form  of  premiums  in  money,  or  of  some  more  preferable  type  of 
bond. 


362  INTRODUCTION  TO  PUBLIC  FINANCE 

Sec.  4.  Should  Bonds  Be  Taxable.  —  A  much  discussed 
question  in  the  United  States  is  whether  pubHc  bonds  should  be 
taxable  or  not.  The  matter  is  really  very  simple.  But  the 
public  mind  is  greatly  confused  and  scarcely  knows  what  the 
issue  is.  What  happened  was  as  follows :  As  long  as  the 
general  property  tax  was  the  only  tax  likely  to  fall  upon  a  public 
bond  the  interest  rate  paid  by  the  government  would  have  to 
be  equal  to  the  market  rate  of  interest  plus  (i)  the  probable 
tax  and  (2)  the  cost  of  shifting  the  tax.  This  was  so  because 
the  holder  of  a  public  bond  feared  that  it  would  surely  be  dis- 
covered and  taxed.  But  he  knew  of  many  other  places  where 
he  could  put  his  money  and  receive  the  market  rate  of  interest 
without  a  tax  to  pay.  So  if  a  state  government  issued  a  taxable 
bond  it  paid  out  in  extra  interest  more  than  it  could  hope  to 
get  back  in  taxes.  Moreover,  it  might  not  get  the  taxes  back  and 
yet  have  to  pay  the  higher  rate  of  interest.  It  was  not  even 
as  broad  as  it  was  long,  for  the  government  was  sure  to  save 
the  cost  of  shifting  if  it  issued  tax-free  bonds,  and  to  pay  only 
the  market  rate  of  interest.  So  it  naturally  came  about  that 
public  bonds  were  sold  tax-free.  But  the  matter  took  on  a  very 
different  complexion  when  the  income  tax  came  in.  Not  having 
foreseen  the  income  tax  the  covenant  had  customarily  read 
"  free  of  all  taxes,"  which  was  understood  to  cover  an  income 
tax  on  the  interest.  Now  if  the  income  tax  were  a  property 
tax  the  situation  would  be  much  the  same  as  it  was  when  the 
general  property  tax  was  the  only  one  to  consider,  and  the 
sensible  thing  to  do  would  be  to  continue  the  old  exemption 
plan.  But  the  income  tax  is  a  personal  tax,  so  the  situation  is 
quite  different.  Interest  on  public  bonds  is  funded  income, 
and  instead  of  exempting  it  the  logic  of  the  tax  requires  that  it 
be  taxed  more  heavily  even  than  earned  or  unfunded  income. 
The  matter  is  still  further  complicated  by  the  surtax,  especially 
by  the  very  high  surtaxes ;  for  tax-free  bonds  constitute  a  fund 
for  investments  by  very  rich  persons  where  their  income  is  free 
of  the  surtaxes.  The  whole  matter  could  be  settled  by  pro- 
viding that  the  exemption  applies  only  to  property  taxes  and 
that  the  interest  when  it  merges  in  a  private  income  loses  its 


FORMS  OF  PUBLIC  DEBTS  363 

identity  as  interest.  While  the  amount  of  tax  exemption  won 
in  this  way  has  been  undoubtedly  grossly  exaggerated  and  the 
contracts  issued  in  the  past  must  be  respected,  there  is  no  good 
reason  for  perpetuating  the  error  in  future  issues. 

Sec.  5.  Special  Provision  to  Enhance  Credit.  —  Of  special 
ways  of  enhancing  credit  only  three  need  be  mentioned.  Coun- 
tries weak  financially  often  pledge  certain  revenues  to  the  pay- 
ment of  their  debts.  Thus  the  customs  duties  are  often  so 
pledged.  This  even  goes  so  far  as  to  place  the  collection  of  the 
duties  in  the  hands  of  the  creditors  or  of  their  governments, 
or  of  some  outside  party.  Countries  whose  currency  is  uncer- 
tain often  agree  to  pay  interest  and  principal  in  some  other 
country  or  in  some  financial  centre  in  the  money  of  some  country 
whose  currency  is  stable.  Very  rarely  loans  may  be  supported 
by  collateral.  This  form  of  loan  was  used  by  France  and  Eng- 
land during  the  Great  War  not  so  much  to  support  the  loan,  al- 
though it  had  that  effect,  as  for  the  purpose  of  moving  funds 
or  credits  to  the  point  where  heavy  payments  were  to  be  made. 
Owing  to  the  breakdown  of  the  exchanges  and  the  one-way  flow 
of  trade,  there  were  no  regular  trade  bills  to  be  had  by  which 
payments  from  Europe  to  the  United  States,  for  example, 
could  be  made.  When  trade  is  normal  it  is  usually  large  enough 
so  that  the  ordinary  exchanges  would  carry  the  credits.  Nor- 
mally, too,  a  country  which  has  collateral  is  not  in  need  of 
borrowing. 

Sec.  6.  Fixing  the  Rate  of  Interest.  —  In  all  of  these  forms 
of  debt-making  the  chief  problem  of  the  practical  financier  is  to 
fix  the  rate  of  interest  as  near  as  possible  to  the  market  rate. 
It  is  best  that  it  should  not  be  below  the  market  rate,  for  in  that 
case  the  bonds  will  sell  for  less  than  par,  and  the  government 
will  have  to  pay  back  a  larger  sum  than  it  receives.  This 
addition  is  accumulated  and  compounded  interest,  which  it  is 
presumably  easier  to  pay  in  annual  instalments  than  at  one 
time.  The  amount  of  the  discount  at  which  such  bonds  will 
sell  depends,  in  part,  on  the  length  of  time  that  they  have  to 
run. 

When  the  market  rate  of  interest  falls,  as  it  generally  does  in 


364  INTRODUCTION  TO  PUBLIC  FINANCE 

time  of  peace,  below  that  at  which  the  debt  was  contracted,  it 
is  generally  desirable  to  reduce  the  rate  of  interest  on  the  debt. 
If,  therefore,  the  government  can  call  in  its  bonds,  it  goes 
through  the  process  of  refunding ;  that  is,  it  issues  new  bonds  at 
the  new  rate  of  interest,  and  pays  off  the  old  ones  with  the 
proceeds.  This  advantage  is  peculiar  to  the  perpetual  bonds, 
and  is  consequently  made  use  of  whenever  the  rate  of  interest 
falls,  which  fact  can  be  ascertained  from  the  quotations  of  the 
bonds  on  the  stock  market. 

Sec.  7.  Productive  Loans.  —  Borrowing  to  secure  the  means 
for  entering  upon  some  productive  enterprise  is  the  chief  cause 
of  the  debts  of  the  several  States  comprising  federal  States  and 
of  local  governments.  Cities  borrow  to  build  waterworks,  to 
construct  street  railroads,  to  establish  a  gas  or  lighting  plant, 
etc.  In  the  United  States  the  different  commonwealths  have 
borrowed  to  aid  in  the  construction  of  railroads  or  to  establish 
banks.  The  enterprise  in  which  the  funds  thus  acquired  are 
invested  furnishes  an  additional  security  for  the  loan,  and 
enhances  the  credit  of  the  local  body,  because  it  is  supposed 
that  the  enterprise  itself  will  yield  the  interest  and  other  debt 
charges.  There  are  two  ways  of  managing  such  enterprises. 
One  is  by  selling  the  commodity  or  service  produced ;  the  other 
is  by  the  assessment  of  a  fee  upon  the  users.  So  far  as  the  debt 
is  concerned  there  is  little  difference  in  these  two  methods. 
The  former,  however,  introduces  a  speculative  element,  while 
the  latter  is  more  regular  in  its  returns.  Sometimes  such  enter- 
prises fail,  and  the  interest  has  to  be  paid  out  of  the  revenue 
from  taxation.  Not  infrequently  debts  of  this  same  kind  are 
made  to  render  assistance  to  private  companies,  and  the  ex- 
pectation is  that  the  companies  will  meet  the  interest  charges. 
The  bulk  of  local  debts  the  world  over  are  of  this  general 
character. 

National  "  Invested  "  Debts.  —  National  governments,  too, 
have  sometimes  contracted  debts  of  this  sort.  Thus  Prussia's 
debt  was  almost  all  incurred  for  the  purchase  of  railroads, 
which  pay  the  interest  and  provide  for  the  sinking  fund.  Other 
countries   of    Europe    have   similar    "  invested  "    debts.     The 


FORMS  OF  PUBLIC   DEBTS  365 

United  States  has  given  aid  to  railroads,  but  on  terms  that 
give  no  real  surety  that  the  debt  charges  will  ever  be  met  by 
the  roads.  The  wisdom  of  such  loans  depends  solely  on  the 
wisdom  of  entering  upon  such  enterprises.  It  may  even  be 
wise  under  certain  circumstances  to  advance  money  borrowed 
in  this  way  to  private  companies  which  promise  to  provide  some 
much-needed  facilities,  even  without  any  hope  that  the  interest 
and  debt  charges  will  be  met  in  any  other  way  than  by  taxation. 
That  such  debts  when  contracted  should  be  treated  in  the  same 
manner  as  any  other  debts,  and  paid  as  soon  as  possible,  is  a 
matter  of  good  business  management.  The  failure  of  the 
assisted  private  enterprise  to  make  good  the  sums  expended 
is  no  reason  for  the  refusal  of  the  government  to  meet  the  obli- 
gations thus  incurred,  and  refusal  under  such  circumstances 
is  as  destructive  of  credit  as  would  be  the  failure  to  meet  any 
other  obligation. 

These  different  forms  of  debts  are  all  in  constant  use,  and  the 
indebtedness  of  any  nation  will  show  almost  all  of  them.  The 
experience  of  the  most  advanced  nation  shows  that  there  is  as 
much  need  of  a  systematic  arrangement  of  the  different  forms 
of  debts  as  there  is  of  the  different  forms  of  taxes.  The  various 
kinds  of  stocks  are  adapted  to  the  differing  needs  of  the  treasury 
and  the  tastes  of  the  lenders.  The  former  must  be  consulted, 
perforce ;  the  latter,  if  it  is  desired  to  obtain  the  most  favourable 
terms;  hence  the  scope  for  the  exercise  of  good  judgment  on 
the  part  of  the  fiscal  officers  in  the  choice  of  forms. 


CHAPTER  III 

NEGOTIATION,  PAYMENT  OF  INTEREST,   CONVERSION, 
AND   REDEMPTION    OF   DEBT 

Section  i.  Two  Methods  of  Negotiating  a  Loan.  —  There 
are  practically  two  methods  for  the  negotiation  of  a  public  loan. 
One  is  to  prepare  the  bonds  or  other  evidences  of  debt  for  sale, 
fixing  all  the  conditions  and  offering  them  to  all  comers  who 
will  accept  those  conditions.  The  other  is  to  determine  the 
amount  to  be  raised,  and  then  to  negotiate  with  bankers  or 
capitalists  or  other  persons  in  order  to  ascertain  on  what  terms 
the  sum  can  be  raised.  There  are,  of  course,  many  variations 
of  these  plans,  but  these  are  the  principal  ones.  In  the  first 
case  the  State  loses  in  a  measure  the  advantage  of  competition 
between  the  lenders.  One  of  the  best  examples  of  this  method 
is  the  so-called  "  popular  subscription."  For  example,  a  State 
decides  to  issue  a  certain  number  of  bonds  at  a  fixed  rate  of 
interest,  selling  them  to  all  comers  at  a  stated  price.  Certain 
places  are  designated  for  the  reception  of  subscriptions.  If 
the  terms  offered  are  too  low,  i.e.  offer  too  little  advantage  to 
the  purchasers,  it  may  be  that  only  a  part  of  the  loan  will  be 
taken  up.  If  they  are  too  high,  the  State,  of  course,  suffers  a 
loss.  In  this  case  everything  depends  on  the  ability  of  the 
fiscal  officers  to  gauge  the  market.  This  task  is  comparatively 
easy  if  the  State  already  has  a  large  number  of  stocks  out- 
standing, the  market  price  of  which  will  roughly  indicate  the 
possible  rate  of  interest  that  will  be  accepted  on  a  pubhc  loan. 
But  the  extent  to  which  the  new  loan  will  probably  depress 
the  market  will  have  to  be  considered.  This  method  with  the 
added  feature  of  the  "  drive  "  became  a  favourite  method  during 
the  World  War.     The  drive  consists  in  organizing  a  vast  number 

366 


NEGOTIATION  AND    REDEMPTION  OF  DEBT         367 

of  volunteer  salesmen,  holding  public  meetings  to  stimulate 
enthusiasm  and  arouse  confidence,  advertising,  and  in  general 
agitation,  all  with  a  view  to  reaching  every  possible  subscriber. 
The  assignment  of  a  "  quota  "  to  each  town  or  district  as  a  goal 
to  work  to  is  another  feature. 

If  the  second  method  be  the  one  chosen,  the  State  lets  it  be 
known  that  bids  for  a  certain  sum  are  desired.  The  bankers 
and  capitalists,  and  sometimes  the  public  at  large,  then  com- 
pete for  the  privilege  of  taking  either  the  whole  issue  or  a  part 
of  it.  The  different  bankers  offer  to  provide  the  whole  or  a 
part  of  the  money  needed  at  a  certain  rate  of  interest,  or  if  the 
face  of  the  bonds  and  the  rate  of  interest  have  been  fixed,  offer 
to  buy  the  stocks  at  a  certain  rate,  generally  quoted  as  so  much 
per  hundred.  The  most  favourable  terms  offered  by  reliable 
bidders  are  then  accepted,  and  they  deliver  the  money  in  mass 
or  in  instalments  to  the  treasury,  in  such  form  as  may  have 
been  agreed  upon,  receiving  in  return  the  securities,  which  they 
are  then  at  liberty  to  dispose  of  as  they  see  fit.  If  the  market 
price  rises,  the  gain  goes  to  the  capitalists ;  if  it  falls,  they  lose. 
Of  course  the  sums  needed  often  exceed  the  wealth  of  any  one 
person  or  group  of  persons,  and  each  purchaser  has  to  depend 
on  his  ability  to  dispose  of  the  securities  to  raise  the  money  to 
meet  his  agreement. 

In  both  of  these  cases  various  secondary  considerations  as 
to  the  form  of  the  loan,  the  length  of  time  it  has  to  run,  etc., 
affect  the  result.  Sometimes  it  has  been  deemed  wise  to  com- 
bine the  two  methods.  That  is,  to  negotiate  with  the  bankers 
for  terms  on  a  part  of  the  debt,  and  then  to  offer  another  part 
on  similar  terms  to  popular  subscription,  or  even  to  allow  of 
more  general  competition  as  to  the  terms. 

Sec.  2.  Place  of  Payment  of  Interest,  and  Minor  Considera- 
tions. —  The  amount  of  the  interest  or  the  rate  is  the  chief 
factor  in  the  negotiation  of  a  debt ;  but  the  place  and  times  of 
payment  and  the  kind  of  money  in  which  payment  will  be 
made  are  minor  considerations  of  considerable  weight.  So, 
also,  is  the  size  of  the  bonds.  In  the  case  of  popular  loans 
which  are  intended  to  be  subscribed  for  by  the  mass  of   the 


368  INTRODUCTION  TO  PUBLIC   FINANCE 

people,  the  bonds  must  be  for  small  amounts;  in  other  cases 
the  units  may  be  larger.  There  is  no  uniformity  in  this  matter. 
The  larger  the  bonds  can  be  made,  the  easier  it  is  for  the  treasury 
to  manage  the  debt.  Of  some  importance,  too,  is  the  choice 
between  bonds  that  are  payable  to  the  holder,  or  to  certain 
persons  by  name,  and  those  payable  to  persons  registered  on 
the  books  of  the  State.  If  the  bonds  are  payable  to  the  holder, 
there  is  no  need  of  a  record  of  the  holders  by  the  government. 
The  government  is  also  spared  the  trouble  and  expense  of  record- 
ing changes  in  ownership.  But  there  is  an  advantage  of  greater 
safety  to  the  holders  in  the  case  of  the  recorded  bonds,  which 
are  thus  insured  against  loss  or  theft. 

It  is  in  general  customary  to  determine  the  place  at  which 
the  interest,  etc.,  will  be  paid.  This  is  frequently  some  im- 
portant commercial  centre,  sometimes  the  treasury  of  the 
State.  If  in  the  country  issuing  the  bonds  there  be  in  circula- 
tion a  debased,  redundant,  or  depreciating  currency,  it  is  often 
agreed  to  pay  the  interest  in  some  foreign  commercial  'centre, 
or  in  foreign  money,  in  order  to  secure  payment  in  a  stable 
currency.  Thus  many  of  the  commonwealths  of  the  United 
States  which  contracted  debts  between  1830  and  1850  agreed 
to  pay  the  interest  in  London  in  order  to  insure  the  payment 
in  gold,  and  to  guard  their  creditors  against  loss  from  the  depre- 
ciated currency  then  in  circulation.  When  the  states  appealed 
to  Congress  for  assistance  in  the  payment  of  their  debts  in 
1842,^  this  was  alleged  as  a  feature  involving  special  hardship. 
A  large  part  of  Russia's  debt  is  payable  in  Holland  and  England, 
and  in  all  of  it  the  kind  of  money  is  specified.  The  same  is 
true  of  the  debts  of  many  other  countries. 

Sec.  3.  Conversion  of  the  Debt.  —  While  it  is  often  neces- 
sary, in  order  to  obtain  the  required  funds  on  the  best  terms, 
to  ofifer  many  different  forms  of  public  securities,  yet  in  a  time 
of  absence  of  pressure  it  may  become  desirable  to  simplify  these 
forms  and  to  consolidate  the  debt.     This  involves  the  calling 

1  See  Johnson,  Report  on  the  Relief  of  the  States,  27th  Con.,  3d  Sess.,  House,  No. 
296;  a  perfect  mine  of  information  on  the  history  of  public  debts  in  the  United 
States  up  to  1842. 


NEGOTIATION  AND   REDEMPTION  OF  DEBT         369 

in  of  the  outstanding  paper  and  its  conversion  into  another 
form.  Conversion  is  generally  undertaken  when  a  fall  in  the 
rate  of  interest  offers  the  State  an  opportunity  to  gain  by  the 
process.  The  reduction  of  the  rate  of  interest  is  possible 
whenever  the  State  enjoys  the  privilege  of  repayment.  It  can 
then  offer  the  creditor  the  choice  of  payment  (for  which  it 
could  obtain  the  money  by  the  sale  of  new  bonds  at  the  new 
rate  of  interest)  or  of  new  securities  at  the  lower  rate.  This 
mode  of  conversion  or  reduction  of  interest  is,  of  course,  per- 
fectly legitimate.  The  reduction  of  the  rate  arbitrarily  with- 
out the  consent  of  the  creditors  is  as  much  repudiation  as  the 
refusal  to  pay  altogether.  It  is  by  numerous  conversions  and 
consolidations  that  the  rate  of  interest  on  the  bulk  of  the  debt 
of  Great  Britain  has  been  reduced  as  low  as  2^  per  cent. 

Sec.  4.  Debts  Must  Be  Paid.  —  The  best  justification  of 
debt-making  is  that  it  distributes  the  burden  of  some  heavy 
expenses  upon  a  later  period.  The  cost  of  this  postponement  is 
the  payment  of  the  annual  interest.  In  order  to  fulfil  the  in- 
tention of  the  loan  and  to  get  rid  of  the  cost  of  the  process,  it  is 
necessary  to  pay  the  debt.  If  these  two  reasons  were  not 
sufficient,  the  danger  of  the  recurrence  of  similar  extraordinary 
needs  and  new  appeals  to  credit,  and  the  eventual  danger  of 
bankruptcy,  point  in  the  same  direction.  As  we  have  already 
seen,  some  of  the  forms  of  debts  contain  within  themselves  the 
provision  for  payment.  Life  and  terminable  annuities  involve 
the  payment  of  the  principal  in  annual  instalments.  Other 
forms  call  for  payment  in  larger  instalments  or  at  the  end  of 
a  term,  for  which  provision  must  be  made  by  the  collection  of 
funds  beforehand.  If,  however,  the  expiration  of  the  period 
finds  the  debtor  State  not  in  the  possession  of  the  funds  needed, 
it  may  have  to  borrow  again  to  fulfil  its  agreements.  In  the 
case  of  most  perpetual  debts  it  would  be  obviously  unfair  to 
call  upon  certain  holders  for  the  surrender  of  their  bonds  and 
to  allow  other  holders  of  the  same  sort  of  bonds  to  retain  theirs, 
especially  if  the  rate  of  redemption  is  below  the  market  rate. 
The  whole  of  any  issue  of  bonds,  therefore,  must  be  treated  as 
a  unit.     This  involves  the  gradual  accumulation  of  a  fund  for 


370  INTRODUCTION  TO  PUBLIC  FINANCE 

the  payment  of  all  of  the  debt  of  the  same  kind  and  issue. 
There  is,  however,  another  alternative.  The  government  may 
enter  the  market  with  this  fund,  before  it  is  large  enough  to  pay 
all  the  debt,  and  purchase  such  of  its  securities  as  are  offered 
for  sale.  Care  must  be  exercised  in  the  application  of  this 
method  not  to  raise  the  price  of  the  securities.  In  some  cases 
arrangements  are  made  in  advance  for  calling  a  portion  of  the 
outstanding  bonds  by  lot.  This  depreciates  the  whole  issue, 
because  each  bond  is  liable  to  be  called. 

The  Sinking  Fund.  —  Provision  made  for  the  accumulation 
of  a  fund  for  the  redemption  of  the  debt  is  called  the  sinking 
fund.^  The  sinking  fund  may  be  defined  in  two  ways ;  either  it 
is  an  annual  fund,  i.e.  a  portion  of  the  annual  income,  or  it  is 
the  accumulated  capital  from  this  and  other  sources  applicable 
to  the  payment  of  the  debt.  Not  strictly  the  earliest,  but  the 
first  important,  attempt  at  the  arrangement  of  a  regular  sinking 
fund  is  that  of  England  in  1786  under  Pitt.  This  was  a  re- 
markable scheme.  It  is  said  to  have  been  suggested  by  Price, 
a  clergyman,  who  in  1772  wrote  An  Appeal  to  the  Public  on  the 
Subject  of  the  National  Debt.  His  argument  was  based  on  the 
productiveness  of  compound  interest.  He  urged  that  a  fixed 
sum,  however  small,  should  be  set  aside  every  year  for  the 
purchase  of  public  stock,  and  that  the  interest  on  the  stock 
thus  purchased  should  continue  and  should  be  applied  to 
further  purchases.  There  would  then  be  two  sources  from 
which  the  debt  would  be  cancelled :  one,  the  payment  of  the 
annual  amount ;  the  other,  the  ever  increasing  interest  fund. 
The  effect  of  such  a  scheme  in  eventually  discharging  any  debt 
was  regarded  as  almost  magical.^  It  was  not  perceived  that 
the  real  efficacy  of  the  scheme  lay  in  the  fact  that  the  nation 
continued  to  bear  the  whole  burden  of  the  initial  interest  charge 
until  the  debt  was  paid,  and  that  the  real  source  of  payment 
was  the  excess  of  taxation  over  expenditure.  In  accord  with  this 
idea  Pitt  appointed  a  "  Board  of  Commissioners  of  the  Sinking 

'  See  Ross,  "Sinking  Funds,"  Pub.  Amer.  Economic  Assoc,  Vol.  VII,  p.  445. 
^  As  an  illustration,  compute  the  sum  which  a  penny  placed  at  interest  in  the  time 
of  Christ  would  amount  to  at  compound  interest. 


NEGOTIATION  AND   REDEMPTION   OF  DEBT         371 

Fund,"  who  were  to  receive  a  fixed  sum  each  year,  with  which  to 
purchase  public  stocks,  at  or  below  par.  Interest  on  the  stocks 
thus  purchased  was  to  be  paid  to  the  commissioners,  and 
quarterly  applied  to  new  purchases.  This  much-admired 
scheme  amounted  to  adding  £1,000,000  annually  to  the  taxes 
needed  for  other  purposes,  and  continuing  the  entire  burden  of 
taxation  until  the  debt  was  paid.  It  is  clear  that  what  was 
really  used  for  debt  payment  was  the  surplus  revenue.  The 
£1,000,000  was  clearly  that,  and  the  interest  on  the  stocks  pur- 
chased therewith  need  not  have  been  paid  but  for  the  sinking 
fund.  There  is,  indeed,  no  source  from  which  the  debt  can  be 
paid  but  taxation  or  similar  net  revenue.  So  great  was  the 
faith  of  the  government  in  this  scheme  that  it  continued  the 
payments  to  the  sinking  fund  even  while  borrowing  for  the  war 
of  1793  and  after.  The  fallacy  of  Dr.  Price's  arguments  was 
pointed  out  by  Professor  Robert  Hamilton  of  Aberdeen  in  1813. 
Shortly  after  that,  it  was  estimated  that,  as  a  result  of  the 
sinking  fund  system  kept  up  during  a  period  of  borrowing,  the 
government  had,  between  1785  to  1829,  borrowed  £330,000,000 
at  5  per  cent  to  pay  a  debt  of  the  same  size  at  4^  per  cent.  The 
scheme  was  then  abandoned,  never  to  be  resumed.  From  this 
time  on  only  genuine  surpluses  were  applied  to  the  payment  of 
the  debt.  This  abandonment  of  the  idea  of  Price  and  Pitt, 
however,  had  a  rather  disastrous  result,  in  that  it  largely  sus- 
pended debt  payment  in  favour  of  tax  remission.  Since  1875 
England  has  tried  a  new  plan.  Without  committing  herself 
to  a  policy  which  would  involve  paying  debts  with  one  hand 
and  borrowing  with  the  other,  and  without  relying  upon  mere 
chance  surpluses,  she  decided  to  appropriate  a  fixed  sum  from 
the  consolidated  fund  for  the  national  debt  services,  to  be 
continued  as  long  as  there  were  no  extraordinary  calls  upon  the 
funds.  In  1895  £25,000,000  was  the  fixed  charge  for  the 
national  debt  services,  of  which  £1,718,263  36.  7^.  went  into 
the  new  sinking  fund;  whereas  in  1875  the  sum  was  fixed  at 
£28,000,000,  and  a  larger  amount  went  into  the  sinking  fund. 
During  the  Boer  War  and  for  a  time  thereafter  the  sinking  fund 
was  suspended.     Thus  in  1901-1902  the  "  national  debt  ser- 


372  INTRODUCTION  TO  PUBLIC   FINANCE 

vices  "  stood  as  follows:  the  "  fixed  charge  "  was  £23,000,000, 
less  £4,640,000,  "  sinking  fund  suspended,"  leaving  £18,- 
360,000,  denominated  as  "  inside  the  fixed  charge  "  ;  in  addition 
to  this  there  was  £3,250,000  interest  on  the  war  debt,  which 
was  "  outside  the  fbced  charge."  In  addition  to  this  England 
has  been  converting  her  debt  into  terminable  annuities,  result- 
ing in  a  mechanical  method  of  debt  payment  which  may  in  time 
of  pressure  work  as  the  old  sinking  fund  did. 

Sec.  5.  American  Sinking  Funds.  —  The  American  system 
of  debt-paying  began  in  1790  with  the  application  of  a  surplus 
from  tunnage  fees  and  imports  to  the  purchase  of  public  bonds 
in  order  partly  to  improve  the  market  price  of  the  bonds  and 
by  thus  improving  the  country's  credit  to  facilitate  conversion. 
In  1792  the  bonds  thus  purchased  were  made  the  basis  of  a  sink- 
ing fund,  it  being  determined  that  the  interest  on  them  should 
continue  and  be  paid  to  a  commission  for  the  further  purchase 
of  public  bonds.  In  1795  the  sinking  fund  commissioners  were 
made  the  recipients  of  certain  revenues  to  be  applied  to  the 
payment  of  definite  portions  of  the  debt.  Ross  thus  sum- 
marises this  fund :  "  The  sinking  fund  was  now  enlarged  by 
the  following  additional  appropriations:  (i)  so  much  of  the 
permanent  duties  as,  with  existing  income,  should  enable  the 
commissioners  to  pay,  in  1796  and  thereafter,  a  yearly  2  per 
cent  of  the  6  per  cent  stock ;  (2)  the  surplus  dividends  on  the 
government's  $2,000,000  of  United  States  Bank  stock  after 
deducting  the  interest  accruing  on  the  remnant  of  the  bank 
loan ;  (3)  so  much  of  the  permanent  duties  as,  with  the  surplus 
dividends,  should  suffice  to  pay  a  yearly  $200,000  on  the  bank 
loan,  till  1802,  and  then  begin  the  redemption  of  the  deferred 
stock ;  (4)  the  proceeds  of  the  sale  of  public  lands ;  (5)  the  pro- 
ceeds of  debts  inherited  from  the  old  governments ;  (6)  all 
revenue  surpluses  of  any  year  remaining  unappropriated  during 
the  next  session  of  Congress."  ^  This  fund  was  not  very  effi- 
cient on  account  of  the  excess  of  expenditures.  It  served  one 
very  important  purpose,  however,  that  of  regulating  the  credit 
of  the  United  States  by  showing  the  intention  to  pay.     In  1802 

1  Sinking  Funds,  p.  49. 


NEGOTIATION  AND   REDEMPTION  OF   DEBT  373 

Gallatin  organised  another  plan,  which  was  continued  for  some 
time.  It  was  to  increase  the  revenues  beyond  the  current 
expenditures  and  apply  the  surpluses  to  the  debt  payment. 
The  results  of  the  two  plans  have  been  compared  as  follows: 
"  The  inherited  debt  and  accrued  interest  amounted  in  1791, 
when  funded,  to  $76,781,953.14.  The  Federalists  in  ten  years 
reduced  this  to  $72,733,599,  but  added  $7,193,400  of  new  stock 
mostly  at  8  per  cent,  thus  bequeathing  a  burden  of  $79,926,999 
to  their  successors.  Of  this,  Gallatin's  sinking  fund  extinguished 
$46,022,810  between  1801  and  181 1.  The  purchase  of  Louisiana, 
however,  added  $11,250,000  to  the  principal,  so  that  on  January 
I,  1812,  the  public  debt  was  $45,154,189,  over  thirty-one  mill- 
ions less  than  the  original  Revolutionary  debt."  ^  This  com- 
parison is  not  altogether  fair  to  Hamilton,  the  author  of  the  older 
plan,  for  his  fund  enabled  important  conversions  to  be  suc- 
cessfully made  which  reduced  the  debt  charges.  During  the 
War  of  181 2  the  payments  to  the  sinking  fund  were  suspended. 
After  the  war  the  debt  stood : 

Old  debt  remaining        $39,905,183.66 

Funded  war  debt 49,780,322.13 

Treasury  notes 18,452,800.00 

Temporar}'  loans 550,900.00 

Total  burden  on  the  sinking  fund        $108,689,205.79 

The  sinking  fund  was  at  that  time  composed  of 

Interest  on  stock  held  by  com $1,969,577.64 

Receipts  from  public  lands 800,000.00 

From  duties 5,230,422.36 

Sinking  fund $8,000,000.00^^ 

The  policy  of  protection,  inaugurated  after  the  War  of  1812, 
separated  income  from  expenditure.  The  ultimate  purpose  of 
most  of  the  taxation,  namely  protection,  was  considered  so  para- 
mount that  a  high  rate  of  taxation  was  continued  for  that 
reason.  The  available  surpluses  were,  therefore,  large,  and 
were  from  time  to  time  applied  to  the  debt.  Down  to  1824, 
when  all  the  debt  contracted  up  to  that  time  was  practically 

'  Ross,  p.  67.  2  Ross,  p.  69,  from  Finance,  Vol.  II,  p.  916. 


374  INTRODUCTION  TO  PUBLIC   FINANCE 

paid,  the  sinking  fund  was  managed  by  a  special  commission, 
but  since  then  the  Secretary  of  the  Treasury  has  had  charge  of 
it.  The  Civil  War  debt  was  by  the  act  of  February  25,  1862, 
supposedly  placed  on  a  secure  basis.  "  The  coin  paid  for  duties 
on  imports  was  to  be  applied  first  to  the  payment  of  interest 
on  the  bonds  and  notes  of  the  United  States.  It  was  then 
to  be  applied  '  to  the  purchase  or  payment  of  i  per  cent  of  the 
entire  debt  ...  to  be  made  within  each  fiscal  year,  which  is 
to  be  set  apart  as  a  sinking  fund,  and  the  interest  of  which  shall 
in  like  manner  be  applied.'  .  .  .  The  residue  of  customs 
receipts  was  to  be  paid  into  the  treasury."  ^  While  no  such 
regularity  as  was  contemplated  by  this  act  was  realised,  yet 
the  debt  has  been  paid  from  surpluses  more  rapidly  than  was 
anticipated,  until  the  reduction  of  the  revenues  in  1895,  due  to 
a  change  in  the  policy  in  regard  to  the  protective  duties,  to- 
gether with  a  redundancy  in  the  monetary  circulation,  which 
resulted  in  a  foreign  drain  upon  the  gold  reserves  held  for  the 
redemption  of  notes  outstanding,  made  new  borrowing  necessary. 
The  war  with  Spain  involved  a  new  increase  of  indebtedness, 
which,  however,  was  contracted  on  terms  remarkably  favour- 
able to  the  government.  The  same  general  policy  of  debt  re- 
duction has  continued,  and  the  debt,  which  amounted  to 
$1,108,000,000  in  1900,  was  by  1908  reduced  to  $938,000,000. 
The  commonwealth  constitutions  of  the  United  States  very 
generally  imposed  upon  the  legislatures  the  duty  of  providing 
a  sinking  fund.  Many  of  them,  besides  limiting  the  amount  of 
debt  that  may  be  created,  either  by  naming  a  fixed  sum  or  a 
fixed  proportion  of  the  revenues  that  may  be  used  for  interest 
payment,  also  provide  that  whenever  a  debt  shall  be  contracted, 
a  tax  shall  at  the  same  time  be  levied  sufiiciently  large  to  pay 
the  interest  charge  and  provide  a  sinking  fund.  The  general 
distrust  of  the  legislatures  is  emphasised  in  the  constitutions 
by  making  such  laws  irrepealable  until  the  debt  is  paid.  The 
commonwealths  are  thus  permanently  committed  to  the  policy 
of  debt  payment,  not  so  much  on  account  of  any  deep-seated 
belief  in  the  efficacy  of  the  particular  methods  laid  down,  which 

^  Ross,  p.  79. 


NEGOTIATION  AND   REDEMPTION  OF  DEBT         375 

may  necessitate  the  continuance  of  debt  payment  even  at  a  time 
of  borrowing,  but  on  account  of  the  widespread  distrust  of  the 
prudence  of  the  legislatures.  The  same  distrust  has  destroyed 
the  danger  of  the  system,  by  almost  entirely  forbidding  debt- 
making  by  the  commonwealths.^ 

Sec.  6.  Summary.  —  In  conclusion,  it  would  seem  that  the 
experience  of  great  nations  shows :  that  debts  must  be  paid ; 
that  they  can  be  paid  only  by  increased  taxation ;  and  that  the 
possible  weight  of  taxation  for  this  purpose  is  determined  by  a 
consideration  (i)  of  the  length  of  time  it  is  thought  desirable 
that  the  debt  shall  run,  (2)  of  the  existing  burden  of  taxation, 
(3)  of  the  general  conditions  of  the  people.  When  the  debt 
has  been  contracted  for  some  productive  purpose,  it  seems 
fitting  that  the  surplus  earnings  of  such  an  enterprise  should  go  to 
debt  payment,  as  this  eventually  enables  a  permanent  lowering 
of  the  cost  of  such  services  to  the  people. 

>  For  a  full  account  of  the  debt  policy  of  the  American  commonwealths  see  my 
monograph,  Das  Kreditwcscn  dcr  Staaten  und  Stiidte  der  N ordamerkanischen  Union 
in  seiner  historischen  Enlwickelung,  Jena,  1891. 


PART    IV 
FINANCIAL   ADMINISTRATION 

CHAPTER  I 

THE  BUDGET;  ADMINISTRATION   OF   EXPENDITURE; 
CONTROL   AND   AUDIT 

t 

Section  i.  Matters  of  Form. — ^To  the  fourth  and  last 
part  of  our  subject  belong  the  formal  arrangements  of  the 
public  finances,  —  the  preparation  and  ratification  of  the  budget, 
the  care  and  preservation  of  the  public  funds,  the  administra- 
tion and  control  of  expenditures,  and  the  collection  of  the  reve- 
nues. It  was  this  side  of  the  subject  that  first  attracted  atten- 
tion and  which  occupied  a  large  part  of  the  writings  of  the 
cameralists.  Lorenz  von  Stein  gives  a  very  considerable  por- 
tion of  his  monumental  work  to  these  subjects,  and  the  able 
French  writer,  Stourm,  has  devoted  to  financial  legislation  a 
volume  entitled  Le  Budget.  English  and  American  economists 
have  generally  left  this  field  to  the  jurists  and  publicists,  but 
Bastable  devotes  the  last  three  chapters  of  his  book  to  some 
of  these  topics. 

In  every  well-regulated  household  and  every  business  concern 
the  keeping  of  accurate  accounts,  the  distribution  of  the  funds 
among  different  persons,  and  the  control  of  expenses  have  an 
importance  second  only  to  the  broader  questions  of  policy. 
Equally  important  in  the  greater  housekeeping  of  the  State 
are  the  formal  arrangements  for  the  enactment  of  fiscal  laws, 
for  the  keeping  of  accounts,  and  for  insuring  compliance  with 
the  laws. 

The  general  frame  of  the  fiscal  administration,  the  relation 
between  the  various  departments,  the  assignment  of  particular 

376 


THE  BUDGET;  CONTROL  AND  AUDIT      377 

powers  and  duties  to  the  different  officials  or  bodies,  depends 
entirely  upon  the  general  political  organisation.  How  these 
features  differ  from  country  to  country  it  is  the  province  of 
political  science  to  describe.  But  the  frame  of  administration 
has  an  effect  on  the  finances ;  and  there  are  certain  principles 
demanded  by  sound  finance  which  are  followed  by  every  country, 
no  matter  what  its  frame  of  government. 

Sec.  2.  History  of  Fiscal  Administration.  —  Of  necessity 
the  methods  of  accounting  and  control  do  not  assume  a  public 
character  until  there  is  a  pretty  clearly  recognised  popular 
interest  in  the  affairs  of  the  State.  At  one  time  the  Roman 
treasury'  under  the  control  of  the  Censors  and  in  charge  of  the 
QucBstors  exhibited  the  features  of  public  economy.  But  under 
the  Empire  the  public  treasury  and  the  private  treasury  of  the 
Caesars  gradually  merged  into  a  single  one,  and  the  methods  of 
accounting  became  that  of  private  rather  than  of  civic  house- 
keeping. 

The  Middle  Ages  were  essentially  unpolitical,  and  in  that 
period  no  system  of  public  treasuries  proper  was  developed, 
except  in  the  free  cities.  As  we  have  already  seen,  there  were 
no  revenues  collected  in  the  monarchies  for  a  distinctly  public 
purpose  until  the  fifteenth  and  skteenth  centuries,  and  con- 
sequently there  could  be  no  public  accounts  or  public  control 
over  the  funds. 

Conflict  Develops  Legislative  Control.  —  The  constant  struggle 
between  the  representatives  of  the  people  and  the  officers  of  the 
older  absolute  governments  for  the  control  of  the  purse  led  to 
the  development  of  distinct  methods  of  accounting  and  control. 
The  most  striking  feature  of  the  modern  systems  in  European 
countries  is  the  establishment  of  the  budget,  and  of  the  right 
of  the  popular  representatives  to  vote  taxes  and  appropriations. 
In  America  the  right  of  the  legislatures  to  control  the  finances 
was  clearly  established  at  a  very  early  date,  and  little  or  no 
advance  has  been  made  beyond  the  crude  methods  first  de- 
veloped. Most  European  countries  have  advanced  more 
rapidly  and  perfected  far  better  systems.  This  higher  devel- 
opment of  the  budget  in  European  constitutional  governments 


378  INTRODUCTION  TO  PUBLIC   FINANCE 

is  explained  by  the  constant  conflict  between  the  branches  of  the 
government  having  interests  which  are  theoretically  opposed. 
The  modern  budget  is  an  outgrowth  of  the  gradual  assumption 
of  power  by  the  legislatures,  and  the  corresponding  loss  of  power 
by  the  executives.  The  latter  have  had  to  ask  for  funds,  and 
the  former  in  granting  them  have  insisted  upon  knowing  what 
they  are  to  be  used  for,  and  upon  having  assurance  that  they 
will  not  be  appHed  in  any  other  way.  In  the  United  States, 
however,  both  the  federal  and  the  commonwealth  legislatures 
suggest,  or  initiate,  financial  legislation  as  well  as  grant  funds. 
Both  of  these  functions  of  initiation  and  of  grant  being  in  the 
same  hands,  there  is  no  conflict  of  interests  such  as  has  developed 
the  systems  of  financial  statements  and  legislative  control  in 
Europe.  The  only  care  in  this  country  is  to  see  that  the  funds 
are  not  appropriated  to  private  purposes,  while  in  Europe  there 
is  the  desire  to  prevent  the  application  of  the  funds  to  other 
public  purposes  than  the  ones  specified. 

Sec.  3.  The  English  Budget.  —  It  has  been  claimed  that  the 
English  system  served  as  a  model  for  the  other  European  coun- 
tries. However  that  may  be,  and  it  is  true  only  in  part,  the 
English  system  will  serve  as  a  good  illustration  of  the  European 
methods.  The  fiscal  year  begins  April  i  and  ends  March  31. 
Each  department  of  the  administration  prepares  a  careful 
statement,  known  as  the  "  estimates,"  for  the  coming  year. 
These  "  estimates,"  each  of  which  comprises  a  good-sized  quarto 
volume,  are  tediously  exact  and  minute  in  the  statement  of  what 
it  is  expected  will  be  needed  for  the  forthcoming  year.  They 
are  called  the  "  army  estimates,"  the  "  navy  estimates,"  the 
"  civil  service  estimates,"  etc.  The  Chancellor  of  the  Exchequer, 
in  turn,  bases  his  estimate  of  all  that  will  be  needed  upon  these 
statements,  and  calculates  the  receipts  from  each  source  on  the 
basis  of  the  revenues  of  the  previous  year.  He  then  presents 
all  the  documents  to  Parliament  with  a  brief,  clear  statement 
of  what  the  expenditure  will  be,  what  it  is  expected  the  reve- 
nues will  be,  what  new  taxes,  if  any,  are  needed,  or  what  taxes 
may  be  remitted  or  changed,  in  order  to  make  the  revenues 
equal  the  expenditure.     This  statement  is  called  the  budget. 


THE   BUDGET;     CONTROL   AND   AUDIT  379 

"  Usually,  but  by  no  means  always,  the  proposals  of  the  Chan- 
cellor of  the  Exchequer  are  accepted  by  the  Commons,  and  even 
when  they  are  not  in  detail,  it  is  seldom  that  the  items  of  expendi- 
ture are  objected  to.  The  House  is  supposed  to  go  through 
the  '  estimates  '  in  detail ;  it  forms  itself  into  a  '  committee  of 
supply,'  and  sanctions  every  item  in  the  three  bulky  volumes, 
but  its  members  have  not,  as  a  rule,  knowledge  enough  of  the 
details  to  offer  effective  criticism,  and  the  utmost  the  committee 
can  be  said  to  do,  on  the  average,  is  to  render  flagrant  abuses 
impossible.  On  the  average,  perhaps  that  is  enough."  ^  Parlia- 
ment cannot  directly  or  indirectly  increase  the  appropriations 
asked  by  the  ministry  in  the  name  of  the  Crown,  nor  add  new 
appropriations.  The  estimates  both  of  revenues  and  expendi- 
ture are  made  with  such  great  care  that  there  is  seldom  either 
a  surplus  or  a  deficit  of  any  large  amount  at  the  end  of  the  year. 
According  to  Bastable  the  estimates  of  expenditure  in  England 
for  the  three  years  April  i,  i88g,  to  March  31, 1892,  as  compared 
with  the  results,  show  an  error  of  only  £137,000  in  a  total  of 
£264,000,000,  or  a  little  over  is.  per  £100,  or  $1  in  $2000.  All 
credits  of  disbursing  officers  expire,  and  their  accounts  close, 
March  31.  All  appropriations  lapse  at  that  time,  except 
those  apportioned  for  the  consolidated  fund.  It  requires  a 
special  act  of  Parliament  to  spend  any  more  money  on  last 
year's  account,  even  though  the  original  appropriation  may  not 
have  been  exhausted. 

Congressional  Financiering.  —  Tn  the  United  States  there  is 
no  connection  between  the  executive  and  legislative  depart- 
ments of  the  government  that  would  allow  of  any  such  arrange- 
ment as  that  of  the  budget  in  England.  The  reports  of  the 
administrative  officers,  the  President,  and  the  Secretary  of  the 
Treasury,  are  made  to  Congress  and  are  often  accompanied  by 
suggestions  of  various  sorts.  But  the  executive  officers  have  no 
real  access  to  the  ear  of  the  House.  Therefore,  no  formal 
budget  is  presented  to  Congress.  Two  separate  committees  in 
the  House  (where  finance  bills  originate,  although  they  may  be 
amended  by  the  Senate)  deal  regularly  with  finances,  —  one  with 

'  Wilson,  The  National  Budget,  p.  147. 


380  INTRODUCTION  TO  PUBLIC  FINANCE 

taxation,  the  other  with  appropriations.  These  committees 
are  the  "  Committee  on  Ways  and  Means  "  and  the  "  Com- 
mittee on  Appropriations."  Bills  involving  expenditure  or 
taxation  are  regularly  referred  to  these  committees.  The  con- 
trol of  these  committees  rests  >solely  on  convention,  there  being 
no  constitutional  provision  for  such  reference.  Even  after  the 
committee  has  presented  an  appropriation  or  revenue  bill, 
there  is  the  greatest  freedom  of  amendment,  and  theoretically 
any  member  of  the  House  could,  if  so  inclined,  present  an  entire 
new  set  of  such  bills  forming  a  budget.  Appropriations  may  be 
increased  or  decreased,  or  new  ones  introduced,  without  reference 
to  the  committees.  Practically  the  control  of  these  committees 
is  very  great,  especially  in  the  matter  of  suppressing  appropria- 
tion bills  that  may  be  referred  to  them  for  consideration.  Cer- 
tain lines  of  expenditure  may  be  suggested  by  other  committees, 
and  theoretically  may  be  voted  on  without  reference  to  these 
controlling  committees.  For  example,  the  navy  and  war  de- 
partments may  receive  appropriations  suggested  by  the  com- 
mittees in  charge  of  them.  Many  other  committees,  as,  for 
example,  the  ones  on  claims,  on  invalid  pensions,  pensions,  etc., 
regularly  bring  in  bills  involving  expenditure. 

Ever  since  the  protective  policy  was  fully  established  the 
United  States  government  has  been  in  the  possession  of  large 
revenues,  which  are  not  determined  in  any  way  by  the  expendi- 
tures. So  that  the  consideration  of  revenue  bills  has  always 
been  complicated  by  other  than  fiscal  considerations,  except 
during  the  Civil  War.  This  sundering  of  the  functions  of 
spending  and  of  obtaining  revenues,  and  the  general  scattering 
of  appropriations,  would  apparently  cause  the  utmost  con- 
fusion. But  the  result  is  not  so  bad  as  might  be  expected, 
(i)  because  of  the  influence  of  the  committees,  (2)  because,  of 
course,  some  attempt  is  made  by  the  House  itself  to  ascertain 
whether  funds  are  or  will  be  available  for  the  purposes  sug- 
gested, (3)  because  the  tax  system  has  not  been  a  variable  one, 
and  has  yielded  a  fairly  regular  and  gradually  increasing  revenue, 
to  spend  which  has  sometimes  taxed  to  the  utmost  the  ingenuity 
of  Congress.     But  the  system  absolutely  prevents  any  system- 


THE   BUDGET;     CONTROL  AND  AUDIT  381 

atic  oversight  of  the  finances  as  a  whole,  and  allows  of  no 
measurement  of  the  relative  weight  of  each  appropriation. 
Credits  to  spending  oflQcers  do  not  expire  at  the  end  of  the 
fiscal  year,  July  i,  as  in  England,  but  generally  continue  in 
force  until  the  entire  sum  is  consumed  or  the  object  is  accom- 
phshed.  Congress  thus  loses  one  advantage  for  the  control  of 
expenditure  that  Parliament  enjoys.  The  American  system, 
however,  has  one  great  advantage  over  the  English  in  that  it 
allows  of  a  more  critical  investigation  by  the  legislature  of  the 
specific  items  of  each  appropriation. 

The  Fiscal  Year.  —  The  date  at  which  the  fiscal  year  expires 
is  generally  set  with  reference  to  the  convenience  of  officials  in 
rendering  their  reports  and  to  the  meetings  of  the  legislatures. 
The  accounts  presented  are  generally  for  gross  income  and 
expenditure,  so  that  the  details  of  the  cost  of  collecting  reve- 
nues and  chance  saving  of  expenditures  can  be  controlled. 

Deficiency  Bills.' — There  is  theoretically  no  sanction  for 
expenditure  of  any  kind  beyond  the  amount  appropriated  by 
the  legislature.  If  any  expenditure  not  so  sanctioned  is  of 
pressing  necessity,  the  administrative  officers  may  sometimes 
assume  the  responsibility  and  make  the  appropriation,  subject 
to  the  ratification  of  the  legislature  when  it  next  meets.  This 
discretionary  power  is  exercised  to  a  very  limited  extent  in  most 
countries.  In  the  United  States,  however,  the  disorder  attend- 
ant upon  the  appropriations  involves  the  annual  presentation 
of  a  "  deficiency  bill."  When  any  action  involving  expendi- 
ture has  been  sanctioned  by  the  legislature,  and  insufficient 
funds  have  been  appropriated,  there  is  a  moral  obligation 
resting  on  the  legislature  to  make  the  requisite  appropriation 
afterward. 

Sec.  4.  English  Control  and  Audit.  —  When  the  budget  has 
been  prepared  and  voted,  the  next  step  is  to  see  that  the  expendi- 
ture is  carried  out  as  authorised  and  to  prevent  any  misappropria- 
tion of  the  funds.  In  England  the  funds  are  deposited  with  the 
Bank  of  England,  subject  to  the  order  of  the  comptroller  and 
auditor-general  only.  This  officer's  duties  are  a  combination 
of  those  of  the  old  board  of  audit  created  by  Pitt  in  1785  with 


382  INTRODUCTION  TO  PUBLIC  FINANCE 

those  of  the  Exchequer,  and  date  from  1866.     No  payment  is 
made  without  (i)  an  act  of  Parhament,  (2)  a  requisition  by  the 
treasury  ^   issued   to   the   comptroller-general,    (3)   a   grant   of 
credit  for  the  amount  authorised  by  the  act  good  for  one  year, 
(4)  a  treasury  order  directing  the  transfer  of  the  money  to  the 
paymaster-general  of  the  service.-     As  the  estimates  have  been 
closely  scrutinised,  there  is  little  opportunity  for  the  misappli- 
cation of  funds.     There  is  none  whatever  for  overdraft.     Again, 
after  the  expenditure  has  been  made,  the  accounts  with  vouchers 
are  passed  through  the  comptroller's  office  for  his  approval,  or 
audit.     The  report  of    that   officer  is   subjected   to    the   final 
revision  of  the  parHamentary  committee  of  public  accounts. 
Thus  the  whole  process  begins  and  ends  with  Parhament.     It 
will  be  seen  that  there  are  really  two  parts  to  the  process.     First, 
the  control  over  the  "  issues  "  to  the  disbursing  officers,  that  is, 
over  the  placing  of  the  public  moneys  in  their  hands.     Secondly, 
the  audit  of  the  accounts  after  the  expenditures  have  been  made. 
Sec.  5.     History  of  Control  and  Audit  in  the  United  States. — 
In  the  United  States  ^  the  direct  control  of  the  money  is  in  the 
hands  of  the  executive  officers,  subject  to  the  statutes  of  Con- 
gress.    The  safeguards  consist  in  making  the  processes  of  ex- 
penditure complicated  and  subjecting  each  item  to  the  scrutiny 
of  several  sets  of  executive  officers.     The  idea  of  the  original 
plan  in  the  United  States  was  not  to  allow  of  issues  to  the  regu- 
lar disbursing  officers,  but  to  control  expenditure  by  a  careful 
scrutiny  of  the  accounts  or  claims  rendered.     The  treasury  was 
to  be  reached  only  after  the  claims  had  been  cut  down  to  the 
lowest  possible  figure.     Claims  against  the  government  were 
first  passed  upon  by  an  auditor,  then  by  a  comptroller,  either 
of  whom  might  reject  them.     Then  the  secretary  drew  a  warrant 
upon  the  treasurer,  and   that  warrant  was  recorded   by  the 
register    and    countersigned    by    the    comptroller.     Hamilton 
found  it  necessary,  for  the  sake  of  economy,  to  pay  cash  for 
many  things  needed  by  the  government,  and  hence  this  original 

1  See  Wilson,  The  State,  pp.  696-698. 

2  CI.  Bastable,  p.  705. 

3  See  Renick  and  Thompson,  Political  Science  Quarterly,  Vol.  \l,  pp.  248-281, 
and  Vol.  VII,  pp.  46S-482, 


THE   BUDGET;    CONTROL  AND   AUDIT  383 

plan  broke  down.  Issues  were  made  to  disbursing  officers, 
and  the  necessary  warrants  were  drawn  for  each  particular 
item  of  expenditure,  afterward,  in  order  to  legalise  the  transac- 
tion. 

For  many  years  the  United  States  had  a  very  complicated 
system  of  audit,  control,  and  record.  There  were  six  auditors, 
so  called,  and  the  "  commissioner  of  the  general  land  office," 
who  was  auditor  for  the  lands  account.  Then  there  were  three 
comptrollers,  known  as  the  first  and  second  comptrollers,  and 
the  commissioner  of  the  customs.  Lastly  there  was  the  register. 
All  of  these  were  assisted  by  a  large  body  of  clerks.  These 
officers  were  organised  into  four  coordinate  branches,  with 
separate  jurisdiction.  Accounts  were  first  examined  and  passed 
upon  by  an  auditor,  then  reexamined  by  a  comptroller.  Claims 
disallowed  by  these  officers  could  be  pushed  in  the  Court  of 
Claims,  and  appealed  from  there  to  the  Supreme  Court.  The 
assignment  of  accounts  to  the  different  auditors  and  comp- 
trollers was  almost  arbitrary  and  with  little  system.  The  first 
auditor  looked  over  the  general  income  and  expense  accounts 
of  the  treasury,  the  special  accounts  of  the  customs  receipts, 
the  expenditures  for  the  legislative  and  executive  departments, 
special  accounts  of  the  treasury  department,  —  as  of  the  inter- 
state commerce  commission,  of  the  public  debt,  of  engraving 
and  printing,  of  the  coast  and  geodetic  survey,  of  the  life-saving 
service,  of  the  lighthouse  establishment,  of  the  public  buildings, 
of  the  government  of  territories,  of  the  District  of  Columbia, 
of  the  central  administrative  departments  of  war,  navy,  the 
interior,  etc.,  of  the  departments  of  labour  and  of  agriculture, 
and  all  the  expenditure  for  the  judiciary.  The  second  auditor 
had  the  accounts  from  the  Indian  service  and  the  army.  The 
third  auditor  had  the  pension  account.  The  fourth  had  the 
accounts  of  the  navy.  The  fifth  looked  over  the  accounts  of 
the  collector  of  the  internal  revenues.  The  sixth  was  for  the 
postal  accounts.  The  first  comptroller  then  revised  the  accounts 
that  were  assigned  to  the  first  and  fifth  auditors,  except  the 
customs  account,  for  which  the  commissioner  of  the  customs 
was  comptroller,  and  those  of  the  commissioner  of  the  general 


384  INTRODUCTION  TO   PUBLIC   FINANCE 

land  office.     The  second  comptroller  had  the  accounts  of  the 
second,  third,  and  fourth  auditors. 

All  of  this  was  changed  by  "  the  act  of  July  31,  1894,  making 
appropriations  for  the  legislative,  executive,  and  judicial  ex- 
penses of  the  government  for  the  fiscal  year  ending  June  30, 
1895.  This  act  altered  the  accounting  offices  of  the  treasury 
and  changed  materially  the  system  of  accounting.  The  detail  re- 
vision of  accounts  heretofore  made  by  the  first  comptroller,  as 
well  as  by  the  second  comptroller  and  the  commissioner  of  cus- 
toms, was  abolished,  as  were  the  offices  of  the  second  comp- 
troller and  the  commissioner  of  customs,  the  first  comptroller 
being  made  the  sole  comptroller  of  the  treasury.  A  revision  of 
accounts  under  the  new  system  is  only  made  when  either  the 
head  of  a  department  or  the  claimant  is  dissatisfied  with  the 
settlement  of  an  account  by  an  auditor,  or  when  the  comptroller 
himself  has  reason  to  believe  that  any  particular  account  ought 
to  be  subjected  to  a  second  revision.  Much  labour  has  been 
saved  by  this  system,  and  the  adjustment  of  accounts  has  been 
greatly  expedited.  It  was  one  of  the  duties  of  the  first  comp- 
troller to  '  countersign  all  warrants  drawn  by  the  Secretary  of 
the  Treasury  which  shall  be  warranted  by  law.'  This  duty  was 
continued  with  the  comptroller  of  the  treasury  under  the  new 
system.  As  the  Secretary  of  the  Treasury  has  the  duty  de- 
volved upon  him  of  originating  warrants  and  as  all  such  warrants 
must  be  countersigned  by  the  comptroller,  no  warrant  finally 
becomes  effective  without  their  concurrent  action."  1 

There  are  now  six  auditors :  (i)  for  the  treasury  department, 
(2)  for  the  war,  (3)  for  the  interior,  (4)  for  the  navy,  (5)  for  the 
State  and  other  departments,  (6)  for  the  post-office.  The 
accounts  are  still  distributed  in  the  old  arbitrary  unsystematic 
fashion  among  the  different  auditors  according  to  the  illogical 
scheme  by  which  the  different  duties  are  divided  among  the 
departments.2  It  is  hard  to  see  how  this  can  be  bettered  until 
the  work  of  the  departments  is  rearranged.  The  recent  change  is 
a  great  gain  in  the  direction  of  simpHcity  and  speed.     The 

'  Finance  Report,  i8g4,  pp.  836,  837. 
*  See  Wilson,  The  Stale,  pp.  567-570. 


THE  BUDGET;  CONTROL  AND  AUDIT      385 

auditor's  work  stands  unless  appealed  to  the  comptroller,  and 
is  no  longer  necessarily  gone  over  again  by  a  comptroller. 

The  Register's  Office.  —  The  register  keeps  ledger  accounts 
with  all  appropriations  made  by  Congress,  and  also  keeps  all 
the  personal  disbursement  and  receipt  accounts  pertaining  to 
the  customs,  internal  revenue,  diplomatic,  treasury,  judiciary, 
interior,  civil  services,  and  the  public  debt.  General  receipt 
and  expenditure  ledgers  have  been  kept  running  from  the  founda- 
tion of  the  government.  The  register  furnishes  to  the  proper 
accounting  officers  copies  of  all  warrants  covering  proceeds  of 
government  property,  where  the  same  may  be  necessary  in  the 
settlement  of  accounts  in  their  respective  offices.  He  also 
furnishes  certificates  of  balances,  advances,  and  repayments 
to  the  offices  of  the  first  and  fifth  auditors,  for  settlements  of 
accounts,  and  certifies  to  the  first  comptroller,  on  requisitions 
for  advances,  the  net  indebtedness  of  disbursing  agents  as  shown 
by  the  ledgers. ^  The  treasury  department  itself  exercises  a 
pretty  extensive  supervision  over  expenditures. 

The  system  of  disbursing  officers,  one  connected  with  each 
bureau,  commission,  department,  or  other  branch  of  the  gov- 
ernment to  which  appropriations  are  granted,  still  continues 
in  the  federal  government.  Each  of  these  officers,  under  bond, 
receives  such  advances  from  the  treasury  as  may  be  necessary, 
and  pays  the  various  claims  that  may  come  up  against  his 
appropriation.  He  is  responsible  for  the  payments  he  makes 
until  released  by  the  approval  of  the  proper  auditor  and  of  the 
comptroller. 

In  general  it  may  be  said  that  public  audit  is  much  the  same 
as  private  audit.  It  has  for  its  object  a  certification,  by  some 
properly  constituted  authority,  that  each  collection  and  each 
disbursement  was  made  in  accordance  with  law.  The  fact  that 
in  public  audit  the  connection  between  the  collection  of  the 
disbursement  and  the  law  has  to  be  clearly  established  gives 
to  public  audit  a  degree  of  formality  that  is  not  always  observed 
in  private  audit.  Another  difference  is  found  in  the  fact  that 
the   public   auflil    usually   closes   with   a   formal   certification, 

*  Finance  Report,  1894,  p.  737. 


386  INTRODUCTION  TO  PUBLIC   FINANCE 

which  reUeves  the  collecting  or  disbursing  officer  of  further 
responsibihty.  Such  certificates  are  either  issued  to  the  officers, 
at  stated  intervals,  or  are  appended  to  each  voucher,  whether 
for  collections  or  for  disbursements. 

Sec.  6.  Recent  Budget  Movement  in  the  United  States.  — 
A  strong  movement  is  being  made  in  the  United  States  at  the 
present  time  to  introduce  a  budget  system  both  in  the  federal 
government  and  in  state  and  local  governments.  For  reasons 
stated  above  no  real  budget  after  the  European  plan  can  be 
introduced  without  sacrificing  the  principle  of  separation  of 
the  executive  from  the  legislative  powers,  a  most  valued  feature 
of  our  government.  Many  current  proposals  overlook  this. 
It  is  fairly  certain  that  any  executive  budget  would  fail  of 
recognition  by  the  legislative  branch.  It  seems  clear,  there- 
fore, that  the  only  possibihty  is  for  Congress  or  the  legislatures 
to  so  reorganise  their  committees  as  to  consider  both  revenues 
and  expenses  in  one  committee.  While  it  would  be  desirable 
that  such  a  committee  should  sit  continuously  or  at  least  in  the 
interim  between  sessions,  that  does  not  seem  feasible.  The 
next  best  suggestion  among  those  feasible  is  a  board  after  the 
pattern  of  the  recent  State  Boards  of  Control  which  shall 
prepare  data  for  submission  to  a  joint  expenditure  and  revenue, 
or  more  broadly,  budget  committee  of  the  lower  house.  To 
insure  that  such  a  board  have  the  proper  data,  it  should  be 
given  extensive  power  of  pre-audit.  The  change  could  be  made 
in  the  federal  government  with  facility  by  restoring  to  the 
Comptroller  the  functions  of  control  which,  perhaps,  his  name 
implies,  and  vesting  him  with  a  pre-audit  and  then  imposing 
upon  him  the  duty  of  preparing  for  consideration  of  Congress  a 
budget.  The  advantage  gained  would  be  in  having  at  hand  a 
systematic  presentation  of  all  the  figures. 


CHAPTER   II 

COLLECTION  OF  THE  REVENUES,  CUSTODY  OF  THE  FUNDS. 
AND    THE   PUBLIC   ACCOUNTS 

Section  i.  Early  Methods  of  Collecting  Revenues. — 
Under  the  early  methods  of  collecting  revenues,  the  tribute 
due,  the  economic  receipts,  and  the  voluntary  contributions 
were  delivered  directly  to  the  chief  or  leader.  Many  of  the 
early  direct  taxes  were  similarly  treated.  Indirect  taxes  upon 
commodities  and  transactions  could  not  be  managed  in  this 
way.  The  first  crude  method  of  dealing  with  these  taxes  was 
that  of  the  tax-farmer,  the  Roman  publican.  He  purchased, 
for  a  price,  the  privilege  of  collecting  all  of  certain  kinds  of 
taxes  that  he  could  obtain.  The  same  method  was  extended 
to  other  taxes  where  there  was  no  similar  necessity  for  it.  This 
farming  of  taxes  was  used  through  the  imperial  era  of  ancient 
Rome,  and,  copied  by  France,  it  was  extended  into  modern 
times.  The  various  direct  contributions  of  the  Middle  Ages, 
which  were  apportioned  among  the  different  cities  or  "  estates," 
were  frequently  delivered  directly  to  the  prince  or  his  treasurer. 
All  of  these  crude  methods  were  abandoned  as  soon  as  there 
was  a  distinct  recognition  of  the  authority  of  the  taxing  power 
over  all  the  different  parts  of  the  country  and  over  each  con- 
tributor individually.  The  apportionment  system,  as  originally 
used,  was  a  more  or  less  distinct  recognition  of  the  autonomy, 
and  possibly  of  the  partial  political  independence,  of  the  tax- 
payers, be  they  provinces,  cities,  or  classes  of  individuals. 

Sec.  2.  Collection  of  Customs  Duties.  —  The  collection  of 
the  taxes  is  usually  the  duty  of  the  regular  fiscal  officers  of  the 
general  administration,  hut  industrial  and  commercial  receipts 
are  frequently  collected  by  special  boards  in  charge  of  them, 

387 


388  INTRODUCTION  TO  PUBLIC   FINANCE 

who  turn  the  money  over  to  the  treasury.  Assessment  and 
collection  are  so  closely  connected  that  they  can  be  studied 
together.  In  the  collection  of  customs  duties  there  are  two 
things  for  the  officials  to  care  for.  (i)  They  must  look  out  for 
the  arrival  of  all  the  taxable  commodities  and  prevent  smug- 
gling. (2)  They  must  ascertain  the  value  of  the  goods  if  the 
taxes  are  ad  valorem,  and  the  number  and  size  of  the  pieces  if 
specific.  The  invoices,  supported  by  the  usual  certificates, 
oaths,  etc.,  are  of  the  nature  of  a  declaration  by  the  owner,  or 
importer.  They  are  then  subjected  to  the  scrutiny  of  official 
appraisers,  whose  knowledge  of  the  nature  and  value  of  the 
goods  is  very  accurate.  The  tax  is  then  paid  to  the  collector 
at  the  place  of  importation  or  when  it  reaches  the  recipient  in 
the  interior,  but  before  it  is  delivered  to  him.  In  case  the  goods 
are  to  be  admitted  into  the  interior  of  the  country,  or  of  the 
customs  district,  before  the  tax  is  paid,  as  is  the  case  when  the 
person  to  whom  the  goods  are  sent  resides  in  the  interior,  the 
package  is  sealed  up,  or  "  bonded,"  and  the  seals  can  only  be 
broken  by  an  authorised  collector  after  the  payment  of  the  tax. 
In  countries  where  there  are  no  general  tax-collectors  in  the 
interior,  this  method  is  not  feasible,  and  the  goods  are  held  in  the 
customhouse  on  the  boundary  until  the  tax  is  paid.  With  a 
few  exceptions  this  is  the  practice  of  the  United  States.  But 
in  Germany,  where  there  are  regular  fiscal  officers  of  the  central 
government  in  almost  every  hamlet,  goods  are  regularly  shipped 
to  the  consignee,  and  the  tax  paid  in  the  interior. 

Collection  of  Excises.  —  In  the  case  of  excises,  the  factories, 
breweries,  fields,  and  other  places  where  the  taxed  goods  are 
produced  are  subject  to  regular  inspections,  and  are  more  or 
less  under  the  constant  supervision  of  the  officials.  The  tax  is 
collected  directly  from  the  producer  or  by  the  sale  of  stamps 
and  licenses. 

Sec.  3.  Assessment  of  Direct  Taxes.  —  In  the  case  of  direct 
taxes,  it  is  the  assessment  that  is  the  most  difficult  part  of  the 
process.  The  methods  of  assessing  some  of  the  taxes  have 
already  been  suggested.  The  work  consists  of  two  parts. 
(i)  It  is  necessary  to  ascertain  the  base  —  the  persons,  the 


COLLECTION  OF  THE   REVENUES  389 

property,  or  the  revenues  subject  to  taxation.  (2)  It  is  then 
necessary  to  fix  upon  the  valuation,  or  the  rating  of  the  base 
in  each  particular  case.  The  latter  part  of  the  process  is  "  mak- 
ing the  assessment."  In  this  the  contributor  may  be  called 
upon  to  assist,  or  the  officers  of  the  government  may  proceed 
entirely  alone.  Generally  a  declaration  is  requested,  or  may 
be  required,  from  the  taxpayer,  and  the  officials  then  investigate 
the  truth  of  that  declaration.  In  Europe  it  is  customary  to 
form  assessment  commissions  consisting  of  representatives  of 
the  taxpayers  in  the  district,  who  are  acquainted  with  the  local 
conditions  and  act  with  the  officers  of  the  government.  These 
commissions  help  the  regular  officers  of  the  fiscus  to  make  the 
assessment,  or  sit  as  a  sort  of  court  to  hear  appeals  from  the 
assessment  made,  or  both.  The  final  assessment,  however,  is 
made  by  the  fiscal  officers. 

In  the  American  commonwealths  the  assessment  of  the 
general  property  tax  is  usually  made  by  a  board  of  locally 
elected  assessors  or  an  assessor.  The  assessor  calls  for  declara- 
tions from  the  different  contributors.  The  law  in  most  states 
imposes  severe  penalties  for  failure  to  comply  with  the  require- 
ment of  declaration  or  for  false  declaration.  But,  nevertheless, 
there  is,  for  the  most  part,  the  utmost  laxity  in  enforcing  the  law 
concerning  declarations.  Only  the  unusually  conscientious, 
who  voluntarily  come  forward  with  complete  statements,  are 
reached  in  this  way.  So  general  is  the  habit  of  neglecting  this 
duty  that  it  is  practically  impossible  for  the  assessor,  no  matter 
how  anxious  he  may  be  to  have  the  law  complied  with,  to 
prosecute  all  the  persons  whom  he  knows  are  evading  assess- 
ment. The  general  practice  is  to  default  the  declaration  and 
allow  the  assessor  to  find  out,  if  he  can,  what  taxable  property 
the  contributor  has.  If  this  were  done  by  only  a  few  persons, 
they  could  easily  be  brought  to  terms  under  the  existing  laws, 
but  when  nine-tenths  of  the  population  refuse  to  comply,  the 
assessor  is  helpless,  and  the  only  effect  that  follows  from  the 
declaration  by  the  few  is  to  make  the  existing  inequalities  of 
the  general  property  tax  worse  than  ever.  Real  estate  and 
other  visible  property  is  easily  assessed.     The  officer  has  at  his 


390  INTRODUCTION  TO  PUBLIC   FINANCE 

command  the  records  of  titles,  of  deeds,  etc.,  which  he  can  in- 
vestigate, and  he  ascertains  the  value  of  each  piece  from  his 
own  personal  observation  of  prevailing  prices.  As  we  have 
seen,  personal,  intangible  property  escapes  almost  entirely. 
It  would  seem  that  this  difficulty  of  administration  is  insuper- 
able. No  merely  severe  methods  of  assessment  will  ever  cure 
the  evil. 

Equalisation.  — ■  Above  the  assessor  in  the  United  States 
there  are  generally  two  boards  of  equahsation,  though  some- 
times only  one.  The  first  board  is  local,  covering  the  same 
district  as  the  assessor.  This  hears  appeals  from  the  taxpayers 
in  regard  to  their  assessment.  It  equalises  between  individuals. 
The  second  board  is  for  the  whole  commonwealth,  and  is  known 
as  the  state  board  of  equalisation.  This  board  is  to  adjust  the 
burden  of  state  taxation  equally  between  the  different  districts. 
As  has  already  been  explained,  a  local  assessor  may  make  the 
assessment  in  his  district  lower  than  that  in  the  other  districts. 
This  will  not  affect  the  burden  of  local  taxation,  for  all  that  is 
needed  is  to  raise  the  rate.  But  it  lessens,  if  the  assessment 
stands,  the  burden  which  the  state  taxes  impose.  These  cen- 
tral boards  are  of  three  kinds :  (i)  those  with  power  to  add  to 
or  subtract  from  the  assessment  of  each  district,  but  in  such  a 
way  as  not  to  change  the  total  amount;  (2)  those  with  power 
to  change  the  assessment  of  any  district,  and  which  may  and 
generally  do  change  the  total  assessment  of  the  state ;  and  (3) 
those  with  power  to  change  the  valuation  not  only  of  districts 
as  a  whole,  but  of  classes  of  property,  or  even  of  individuals 
within  any  district.  As  these  boards  seldom  have  sufficient 
powers,  and  never  sufficient  information  as  to  the  local  condi- 
tions, the  effect  of  their  action  is  not  all  that  could  be  desired. 
The  only  possible  solution  of  this  difficulty  is  the  separation 
of  local  taxation  from  that  of  the  commonwealths,  so  that  the 
assessment  can  be  made  independently  for  each. 

Sec.  4.  Convenience  of  the  Contributor  to  Be  Consulted  in 
Collection.  —  After  the  assessment  has  been  completed,  it  is 
comparatively  easy  to  make  the  collection.  All  that  is  needed 
is  a  collecting  agent  of  the  treasury  conveniently  located,  to 


COLLECTION  OF  THE   REVENUES  391 

whom  the  taxpayers  may  go,  or  a  collector  who  goes  to  the 
taxpayers.  The  burden  of  taxation  may  be  seriously  increased 
if  the  convenience  of  the  taxpayers  is  not  consulted  in  this 
matter.  The  size  of  the  district  over  which  a  collector  has 
supervision  will  depend  upon  the  density  of  the  population. 
If  the  collector  is  to  be  sought  out  by  the  contributors,  it  is  best 
that  his  office  should  be  located  in  some  business  centre  fre- 
quently visited  by  the  contributors.  According  to  the  principle 
of  "  certainty  and  convenience,"  the  taxes  assessed  upon  the 
same  person  should  all  be  entered  in  a  single  bill  and  all  be 
payable  to  the  same  collector.  The  taxpayer  should  be  in- 
formed as  early  as  possible  of  the  total  amount  of  taxes  that 
he  has  to  pay,  of  the  number  of  instalments  in  which  they  are 
payable,  and  of  the  conditions  of  delinquency  and  its  penalty. 
Some  of  the  American  commonwealths  disregard  this  rule 
entirely.  They  add  grievously  to  the  burden  of  taxation, 
especially  in  the  country  districts,  where  taxes  are  already 
entirely  out  of  proportion  to  the  ability  of  the  people,  and  in- 
crease the  irritation  felt  by  the  contributors,  by  inconvenient 
location  of  the  collector's  office,  and  by  requiring  the  payment 
of  state  and  county  taxes  to  one  set  of  collectors,  while  the 
town  and  other  municipal  taxes  are  paid  to  a  different  set  and 
upon  separate  bills.  The  most  economical  and  least  irritat- 
ing process  is  to  have  all  the  taxes  collected  by  the  same 
person.^ 

Sec.  5.  Moving  Public  Funds.  — The  transfer  of  the  public 
funds  from  one  part  of  the  country  to  another  is,  in  modern 
times,  attended  with  little  risk.  It  is  most  conveniently  done 
by  means  of  the  banks  or  the  post-office.  If  the  country  rs 
sparsely  populated  and  insecure,  the  collector's  office  should  be 
at  or  near  the  bank  or  vault  in  which  the  money  is  to  be  stored. 
In  large  countries,  as,  for  example,  the  United  States,  it  is 
convenient  to  have  a  number  of  branch  treasuries  scattered 
about   the  country,  at   which   collections  can   be   made,   and 

1  The  writer  knows  of  an  instance  where  a  farmer  has  to  trMvil  I'ifty  miles  to  pay 
his  state  and  county  taxes,  while  the  local  taxes  are  collected  within  two  miles  of 
his  home.    This  is  not  an  extreme  case. 


392  INTRODUCTION  TO  PUBLIC   FINANCE 

through  which  money  for  expenditure  can  be  distributed  to 
the  disbursing  officers.^ 

Safe-keeping.  —  The  storage  or  safe-keeping  of  the  funds  is 
accomphshed  in  one  of  three  ways,  (i)  As  in  England  a  great 
State  bank  is  made  custodian  of  the  funds  which  are  sent  to  it 
from  the  various  collectors  who  deposit  with  its  branches. 
(2)  As  in  France  and  the  United  States  the  treasury  and  the 
subtreasuries  are  the  chief  custodians  of  the  funds.-  (3)  As  in 
the  commonwealths  of  the  United  States,  where,  except  in  a 
few  states,  private  or  other  banks  are  made  the  depositories  of 
the  public  moneys.  When  protected  by  proper  safeguards, 
such  as  the  giving  of  personal  bonds  and  collateral,  the  bank 
depository  system  has  proved  itself  far  safer  and  more  economi- 
cal than  the  independent  treasury,  which  is  only  to  be  defended 
on  political  grounds,  if  at  all.  The  experience  of  the  United 
States  federal  government  in  the  early  days  with  "  pet  banks  " 
points  to  the  political  difficulties  of  the  bank  depository  system. 
The  bank  deposit  system  prevents  the  periodic  disturbance  of 
the  circulation  by  the  withdrawal  or  storage  of  money.  If  the 
independent  treasury  system  were  used  by  all  the  departments 
of  government,  this  disturbance  would  possibly  be  serious 
enough  to  affect  prices.^ 

Sec.  6.  Bookkeeping.  —  The  mere  mechanical  details  of  the 
methods  of  bookkeeping  and  pubhc  accounts  cannot  be  de- 
scribed here.  About  all  that  can  be  done  is  to  make  such  ex- 
planation as  will  enable  the  student  to  easily  comprehend  the 
published  accounts  and  statistics  in  their  main  features. 

The  revenue  account  is  generally  very  simple.  It  contains 
items  named  according  to  the  sources  from  which  they  come. 
Care  must  be  taken  in  studying  the  reports  of  the  fiscal  officers 
on  the  revenues  to  distinguish  the  receipts  that  represent  in- 
come from  the  receipts  that  are  merely  formal  transfers  and 

1  Subtreasuries  are  at  Baltimore,  Boston,  Chicago,  Cincinnati,  New  Orleans, 
New  York,  Philadelphia,  St.  Louis,  and  San  Francisco. 

2  According  to  law,  the  treasurer  and  disbursing  officers  of  the  United  States 
may  make  deposits  in  the  national  banks. 

^  Cf .  Kinley's  "Independent  Treasury,"  and  Buckley's  "Custody  of  State 
Funds,"  Annals  of  the  American  Academy,  Vol.  VI,  3,  November,  1895. 


COLLECTION  OF  THE   REVENUES  393 

bookkeeping  expedients.  For  example,  the  English  finance 
account  of  the  United  Kingdom  for  the  year  ending  March  31, 
1895,  contains  the  following:  Receipts  —  I.  Balance  in  Ex- 
chequer, April  I,  1894,  £5,977,118  185.  gd.;  II.  Revenues 
received  into  the  Exchequer,  viz.  customs,  excises,  etc.,  £94,- 
683,762  los.  2d.;  total,  £100,660,881  8s.  lid.  This  was  what 
England  had  to  draw  on.  But  following  that  appear  a  number 
of  other  "  Exchequer  receipts,"  among  which  are  repayments 
of  advances ;  as,  (i)  by  the  mint  for  the  purchase  of  bullion  for 
coinage,  £700,000,  representing  merely  a  return  to  the  Ex- 
chequer of  money  temporarily  passed  to  the  mint.  The  same 
year  the  Exchequer  advanced  to  the  mint  £615,000,  which  will 
appear  in  1896  as  a  receipt  increased  by  the  seigniorage.  (2) 
The  Exchequer  borrows  money  temporarily  in  anticipation  of 
the  revenues.  This  appears,  of  course,  as  a  receipt  of  £13,- 
700,000,  but  is  not  revenue.  (3)  It  renewed  a  number  of  out- 
standing bills  and  bonds  amounting  to  £14,123,400.  These 
appear  as  receipts,  offset,  of  course,  by  an  equal  expenditure. 
But  (4)  it  created  an  additional  debt  of  £760,000,  for  barracks 
and  telegraph.  This  sum  may  fairly  be  called  revenue.  So 
that  the  total  amount  of  money  that  came  as  actual  income  to 
the  treasury^  was  £101,420,881  85.  iid.  But  the  total  receipts 
foot  up  £130,217,647  135.  Sd. 

On  the  expenditure  side  the  issues  or  credits  to  disbursing 
officials  are  first,  the  consolidated  fund  "  services  " ;  that  is, 
the  payments  for  (i)  the  "  national  debt  services,"  (2)  the 
"  other  consolidated  fund  services,"  which  consist  of  the  civil 
list,  annuities  and  pensions,  salaries  and  allowances,  courts  of 
justice,  miscellaneous  "  services,"  the  Exchequer  contributions 
to  Ireland,  and  the  annuity  under  the  Indian  army  pension 
deficiency  act  of  1885.  After  the  consolidated  fund  "  services," 
which  foot  up  to  £26,500,000,  come  the  supply  "  services  " 
for  the  army,  ordnance  factories,  navy,  and  miscellaneous  civil 
"  services,"  for  the  collection  of  customs  and  inland  revenue, 
post-office,  telegraph,  and  postal  packet  "  services."  These 
two  items,  the  consolidated  fund  and  supply  "  services,"  con- 
tain   all    that    is   strictly   chargeable    to    the    revenue.     They 


394  INTRODUCTION  TO   PUBLIC   FINANCE 

amounted  in  1895  to  £93,918,420  185.  ^d.  In  addition  there 
were  special  expenditures  of  £810,000,  making  a  total  of  £94,- 
728,420  185.  4d.  But  there  were  a  large  number  of  additional 
issues:  (i)  bills  and  bonds  paid  off  by  receipts  from  new  bills, 
(2)  temporary  advances  repaid,  a  part  of  which  were  for  defi- 
ciencies in  the  consolidated  fund.  These  and  one  or  two  other 
minor  items,  with  a  balance  of  £6,300,826  155.  /[d.,  brought 
the  "  issues  "  up  to  the  receipts. 

Public  Accounts,  United  States.  —  In  studying  the  accounts 
published  by  the  treasury  department  of  the  United  States,  we 
have  different  difficulties  to  meet.  There  is  generally  a  clear 
statement,  free  from  repetitions,  or  transfers,  of  the  revenues 
according  to  the  sources,  and  of  expenditures  according  to  de- 
partments, or  objects.  The  only  difficulties  arise  from  the 
peculiar  and  arbitrary  grouping  of  the  expenditures.  This 
comes  from  the  illogical  distribution  of  duties  among  the  different 
departments  already  referred  to.  Some  of  the  peculiarities 
are  that  the  expenditure  for  the  "  civil  establishment  "  includes 
foreign  intercourse,  public  buildings,  collecting  the  revenues, 
deficiency  in  postal  revenues,  rebate  of  tax  on  tobacco,  refund- 
ing of  direct  taxes,  French  spoliation  claims,  District  of  Colum- 
bia, and  similarly  incongruous  items.  Those  for  the  military 
establishment  included  rivers  and  harbours,  forts,  arsenals, 
and  sea-coast  defences ;  for  the  naval  establishment  included 
construction  of  new  vessels,  machinery,  armament,  equipment, 
and  improvement  of  navy  yards.  Expenses  not  otherwise 
classified  are  generally  listed  as  expenses  of  the  treasury  depart- 
ment. 

Sec.  7.  The  "  Funds."  —  An  interesting  phase  of  public 
bookkeeping  is  the  separation  of  accounts  into  funds. ^  When 
Parliament  voted  a  tax,  it  was  formerly  for  a  definite  purpose, 
and  the  plan  was  to  reserve  the  whole  of  it  for  the  proposed 
purpose.  But  the  receipts  and  expenditures  of  these  funds 
never  exactly  balanced,  and  simplicity  finally  required  that  all 
should  be  turned  into  the  consolidated  fund.     This  method  of 

1  A  "fund"  in  this  sense  is  practically  an  appropriation  for  a  specified  purpose 
or  group  of  purposes. 


COLLECTION   OF   THE   REVENUES  395 

bookkeeping  is  best  exhibited  to-day  by  the  accounts  of  the 
commonwealths  in  the  United  States,  although  also  used  in 
national  and  municipal  accounts  to  some  extent.  All  the  re- 
ceipts are  distributed  among  various  so-called  "  funds,"  or 
accounts,  according  to  some  prearranged  plan.  A  separate 
account  is  kept  of  all  receipts  and  expenditures  belonging  to 
each  fund.  With  the  exception  of  a  few  trust  funds  arranged 
to  keep  certain  sums  inviolate,  these  funds  are,  in  effect,  mere 
bookkeeping  contrivances.  With  the  exception  of  the  general 
fund,  which  receives  all  the  money  not  otherwise  appropriated 
to  special  funds,  each  of  these  accounts  generally  bears  the 
name  of  the  expenditure  met  thereby,  sometimes  of  the  rev- 
enues supplying  them.  In  some  commonwealths  the  number 
of  these  funds  is  very  large. ^  The  accounts  are  sometimes 
complicated  by  transfers  from  one  fund  to  another,  in  which 
case  they  appear  twice  in  the  account,  and  frequently  swell 
the  apparent  receipts  enormously. 

Local  Accounts.  —  Local  budgets  are  necessarily  determined 
by  the  frame  of  local  government  and  the  number  of  functions 
performed  by  each.  Thus  in  England  the  public  function  to 
be  performed  constitutes  the  basis  of  local  organisation,  and 
until  the  recent  reforrns  each  local  governing  body  had  only 
one  or  two  duties ;  hence  only  one  or  two  general  accounts  of 
expenditures,  and  one  or  two  sources  of  income.  But  in  America 
each  local  governing  body  generally  has  charge  of  all  the  local 
functions  affecting  a  certain  area,  and  may  have  as  many 
expenditures  and  revenues  as  a  comm_onwealth,  or  even  more. 
Here  methods  of  accounting  defy  classification  and  frequently 
defy  sensible  interpretation,  even  by  the  officials  in  charge. 
There  is  a  crying  need  for  reform  here  in  the  direction  of  uni- 
formity.^ 

1' See  Seligman,  "Finance  Statistics  of  the  American  Commonwealths,"  Pub. 
Amer.  Slatistical  Assoc,  December,  i88g. 

^  See  in  this  connection  a  form  sugKCsted  for  published  rcjjorts  of  municipalities 
by  Professor  H.  B.  Gardner,  in  the  Pub.  of  ihc  Amer.  Staiistical  Assoc,  June,  1889, 
and  adopted,  in  part,  by  the  Eleventh  Census  of  the  United  States,  as  the  basis  of 
schedules  and  inquiries  sent  to  the  muriiri|)alitics  The  studies  of  local  anil  common- 
wealth accounting  made  by  the  United  States  Census  Bureau  and  published  in  the 
volume  on  Wealth,  Debt,  and  Taxation,  1907,  are  especially  valuable. 


\ 


CHAPTER   III 
FINANCIAL   ADMINISTRATION    OF   WAR 

Section  i.  "Extra-ordinary"  Expenses.  —  A  serious  war 
usually  imposes  a  sudden,  new  burden  upon  the  treasury,  the 
exact,  or  even  the  approximate,  size  of  which  it  is  not  possible 
to  estimate  at  the  outset.  Many  of  the  expenses  of  war  belong 
to  that  class  which  financiers  call  "  extra-ordinary  "  to  dis- 
tinguish them  from  the  usual  or  current  expenses  of  the  govern- 
ment. The  amount  by  which  the  ordinary  expenses  are  in- 
creased in  time  of  war  depends  upon  many  circumstances. 
Obviously,  the  chief  factor  is  the  size  of  the  forces  engaged  and 
the  duration  of  the  struggle.  Naturally,  the  chastisement  of  a 
few  dozen  hostile  Indian  braves  in  the  immediate  vicinity  of 
the  regular  army  posts  involves  practically  no  "  extra-ordinary  " 
expenses.  Allowance  is  usually  made  in  the  ordinary  budget 
for  the  expenses  a  war  of  that  kind  would  occasion.  But  many 
circumstances  less  obvious  than  the  size  of  the  forces  engaged 
enter  into  the  determination  of  the  amount  of  the  "  extra- 
ordinary "  expenditures.  Thus,  for  example,  a  naval  war, 
unless  it  happens  to  become  the  occasion  for  the  purchase  of 
new  ships,  involves  comparatively  little  addition  to  the  ordinary 
expenses  of  maintaining  the  navy.  A  country  which  has  a 
large  standing  army  incurs  relatively  less  "  extra-ordinary  " 
expense  when  engaging  in  war  than  a  country  which,  like  the 
United  States,  has  only  a  small  regular  army. 

The  ordinary  expenses  being  provided  for  by  the  regular 
budget,  the  financier's  chief  concern  in  time  of  war  is  the  pro- 
vision of  the  "  extra-ordinary  "  funds.  If  the  operations  of 
the  war  are  likely  to  interfere  with  the  ordinary  revenues,  he 
must  furthermore  be  prepared  to  treat  a  part  of  the  ordinary 
expenses  as  "  extra-ordinary,"  at  least  to  the  extent  of  fur- 

396 


FINANCIAL  ADMINISTRATION   OF  WAR  397 

nishing  new  means  to  meet  them.  It  is  not  often  possible,  and 
still  less  often  expedient,  to  curtail  the  ordinary  expenditures 
in  any  way  for  the  purpose  of  saving  money  to  meet  the  new 
expenses.  How  to  increase  the  receipts  of  the  treasury  by  an 
amount  sufficient  to  insure  the  efficient  conduct  of  the  war, 
without  too  serious  disturbance  of  the  industries  and  commerce 
of  the  people,  upon  which  all  the  revenues  depend,  is  the  problem 
for  the  finance  minister  to  solve.  The  "  extra-ordinary " 
demands  come  thick  and  fast,  especially  at  the  beginning  of 
the  war,  and  they  must  be  met,  and  met  at  once.  The  amount 
which  may  be  needed  at  any  given  time  is  not  ascertainable. 
But  in  spite  of  that,  sufficient  funds  must  always  be  on  hand. 
Upon  this  more  than  upon  any  other  one  thing  depends  the  fate 
of  war.  The  war  financier  can  never  plead  that  he  has  no 
funds,  nor  can  he  ask  for  time  in  which  to  collect.  He  must 
have  the  money  when  it  is  wanted  and  in  the  amounts  required. 
No  degree  of  skill  on  the  part  of  officers  or  bravery  on  the  part 
of  the  men,  no  degree  of  self-sacrifice  at  the  front,  can  com- 
pensate for  failure  on  the  part  of  the  financier  to  provide  the 
ways  and  means.  His  powers  are,  therefore,  of  the  greatest 
and  most  unusual. 

Sec.  2.  Increased  Rates  for  Old  Taxes.  —  Possibly  the  most 
natural  source  to  turn  to  in  time  of  war  for  the  increased  rev- 
enues needed  is  the  existing  system  of  taxes.  At  first  thought 
it  might  seem  proper  to  attempt  to  obtain  new  income  by 
raising  the  rates  of  the  old  taxes.  To  some  extent  this  is  pos- 
sible. In  every  well-arranged  tax  system  there  should  be  some 
taxes  which  can  be  made  to  yield  an  increased  revenue  by 
simply  raising  the  rates.  One  of  the  chief  reasons  for  the 
establishment  and  the  retention  of  the  British  "  property  and 
income  tax,"  for  example,  is  found  in  the  elasticity  of  the  re- 
turns. But  not  all  taxes  can  be  treated  in  this  way.  Some- 
times an  increase  in  the  rate  of  taxation  will  disturb  industry 
and  commerce  and  do  a  greater  injury  to  the  welfare  of  the 
people  than  is  received  from  the  damages  of  war.  Again,  an 
increase  in  the  rates  of  certain  taxes  will  diminish  the  revenue 
or  even  destroy  it  entirely.     In  not  a  few  taxes  the  only  way 


398  INTRODUCTION  TO  PUBLIC   FINANCE 

to  increase  the  revenue  is  to  lower  the  rates.  This  is  the  case 
with  most  protective  duties.  Any  change  in  the  rate  of  such 
taxes  is  bound  to  affect  industry  and  commerce,  and  to  affect 
them  unfavourably  in  the  first  instance,  whatever  the  subsequent 
effect  may  be.  A  war  brings  perplexities  enough  to  business 
without  the  creation  of  artificial  ones,  and  the  financier  should 
not  interfere  with  these  taxes.  It  added  not  a  little  to  the 
perplexities  and  dangers  of  the  Civil  War  in  the  United  States 
that  the  industry  and  commerce  of  the  people  were  repeatedly 
disturbed  during  the  war  by  changes  in  the  tariff  as  well  as  by 
the  military  and  naval  operations  themselves.  There  are, 
therefore,  but  a  limited  number  of  old  taxes  from  which  any 
aid  can  be  sought. 

Sec.  3.     New  Taxes.  — The  next  resource,  naturally,  is  new 
taxes.     But  the  establishment  of  new  taxes,  or  even  the  res- 
toration of  old  taxes  not  in  use  at  the  time  of  the  war,  is  a 
matter  requiring  considerable  time.     Even  if  it  were  an  easy 
matter  to  decide  upon  the  best  form  of  taxation  and  to  get  the 
necessary  authority  from  the  legislative  branch  of  the  govern- 
ment, the  organisation  of  the  new  administrative  forces  for  the 
collection  of  the  taxes  is  a  matter  requiring  time.     No  new 
system  of  taxation  reaches  its  normal  revenue-yielding  powers 
within  many  months  of  its  enactment.     If  the  taxes  are  entirely 
new,  the  time  required  is  longer.     But  even  if  they  are  more 
or  less  familiar  to  the  people  from  use  on  some  previous  occa- 
sion, a  considerable  lapse  of  time  must  intervene  between  the 
beginning  of  war  and  the  receipt  of  sufficient  new  revenues  to 
meet  any  considerable  part  of  its  expenses.     Furthermore,  the 
expenses  of  war  are  now  so  enormous  that  any  system  of  taxa- 
tion which  raised,  or  attempted  to  raise,  the  entire  amount 
needed  during  the  probable  duration  of  the  war  would  be  so 
burdensome  as  to  crush  the  people.     It  is,  therefore,  extremely 
unwise,  and  practically  impossible,  to  attempt  to  raise  the  en- 
tire cost  of  the  war  by  immediate  taxation.     The  only  other 
resource  is  borrowing. 

Sec.  4.     The  Use  of  Credit  in  Time  of  War.  —  The  use  of  the 
public  credit  in  time  of  war  is  attended  by  many  special  difl&- 


FINANCIAL  ADMIXISTIL^TION  OF  WAR  399 

culties.  The  outcome  of  war  is  always  more  or  less  uncertain. 
Even  if  defeat  would  not  entirely  cripple  the  nation's  resources 
and  render  the  repayment  of  the  loan  uncertain,  or  affect  the 
payment  of  interest,  yet  there  are  many  considerations  which 
make  the  lender  hesitate.  The  fact  that  the  duration  of  the 
war,  the  extent  to  which  other  nations  may  become  involved, 
and  many  similar  considerations  affecting  the  size  of  the  total 
demand  upon  the  public  credit  are  unknown,  vastly  increases 
the  difficulty  of  placing  a  loan  on  favourable  terms.  But  on 
that  very  account  it  is  particularly  necessary  for  the  successful 
administration  of  the  war  that  everything  should  be  done  to 
strengthen  and  preserve  the  nation's  credit.  There  may  come 
a  time  in  the  progress  of  the  war  when  the  only  source  from  which 
any  funds  can  be  had  is  the  money  market.  If,  therefore,  the 
financier  has  done  anything  to  weaken  the  nation's  credit  at 
the  beginning  of  the  war,  he  is  apt  to  be  helpless  at  the  close. 
Credit  tends  to  weaken  as  debt  increases. 

It  is  for  this  reason  that  resort  is  frequently  had  in  early  war- 
borrowings  to  the  simplest  and  most  primitive  method  of  debt- 
making  ;  namely,  that  which  provides  revenues  for  the  payment 
of  the  interest  and  the  repayment  of  the  principal  at  the  very 
time  the  debt  is  contracted.  The  creditor  sees  in  the  new 
funds  flowing  into  the  treasury  the  security  for  his  advances 
and  the  guarantee  of  good  faith  on  the  part  of  the  government. 
So  long  as  every  new  loan  is  accompanied  by  new  taxes  from 
which  its  cost  can  be  met,  the  public  credit  is  practically  secure. 
But  if,  on  the  other  hand,  the  government  neglect  this  pre- 
caution during  the  first  stages  of  the  war,  any  attempt  to  resort 
to  it  at  a  later  stage  is  apt  to  be  regarded  as  the  desperate 
device  of  unsound  financial  management  and  the  presage  of 
coming  bankruptcy.    . 

Public  credit  is  a  plant  of  slow  growth  and  extremely  tender. 
It  withers  in  a  day  before  a  breath  of  doubt. 

Inasmuch  as  a  successful  outcome  cannot  be  hoped  for  in 
modern  warfare  without  the  funds  obtainable  solely  by  public 
borrowing,  and  the  necessity  for  loans  increases  the  longer  the 
war  continues,  it  behooves  the  modern  war  financier  to  guard  the 


400  INTRODUCTION  TO  PUBLIC   FINANCE 

nation's  credit  as  his  most  precious  treasure.  No  sacrifice  is 
too  great  which  will  strengthen  it  and  preserve  it  intact  for 
the  later  stages  of  the  war. 

Sec.  5.  During  the  World  War.  —  The  foregoing  condensed 
statement  of  principles  received  full  confirmation  in  the  financial 
policies  and  practices  of  the  different  nations  in  the  World  War, 
as  we  shall  proceed  to  show.  But  before  passing  to  the  history 
of  government  finances  in  the  Great  War  there  are  several 
questions  largely  of  theory  to  be  discussed.  One  is  a  question 
raised  by  a  number  of  economists  chiefly  in  America  which 
requires  special  consideration. 

Can  War  Be  Financed  by  Taxation  without  Loans?  —  Just 
before  the  United  States  entered  the  war,  and  just  after  that, 
a  very  considerable  number  of  able  economists  argued  strongly 
that  it  would  be  possible  and  was  desirable  to  finance  even  a 
great  war  entirely  by  taxation  during  the  progress  of  the  war 
itself,  and  only  to  resort  to  borrowing  to  tide  over  the  interval 
between  the  receipts  of  taxes.  The  purpose  of  these  suggestions 
was  to  prevent,  or  counteract  as  nearly  as  might  be,  the  inflation 
of  the  circulating  medium  which  has  been  an  ever  present 
accompaniment  of  great  wars  in  the  past  and  was  so  severe  in 
this  one.  Inflation,  which  causes  a  rapid  rise  in  prices,  an 
embarrassing  advance  in  the  cost  of  Hving,  and  of  the  cost  of 
waging  war,  is,  in  the  opinion  of  these  economists,  largely  at- 
tributable to  the  use  of  credit  by  governments  to  finance  the 
war.  There  is  no  doubt  that  if  a  government  finances  a  war 
by  the  direct  issue  of  fiat  paper  money  which  passes  at  once 
into  circulation  inflation  will  result.  It  is,  also,  a  generally 
accepted  view  that  other  forms  of  credit  used  by  government, 
such  as  short-time  notes  and  even  long-time  bonds,  pass  in  one 
way  or  another  more  or  less  fully  into  circulation  and  thus  cause 
inflation.  This  may  be  seen  by  following  the  course  of  such 
credits.  The  government  sells  its  bonds  to  the  people.  The 
money  so  received  it  spends,  usually  by  first  depositing  it  in  the 
banks,  then  drawing  checks  against  it  and  in  that  way  passing 
the  credit  at  the  bank  to  some  contractor  or  other  person  who 
sells  something  to  the  government.     The  contractor  or  other 


FINANCIAL   ADMINISTRATION  OF  WAR  401 

person  uses  it  in  turn  to  pay  his  bills  and  so  it  passes  from  hand 
to  hand  and  serves  most  of  the  purposes  of  money.  In  so  doing 
it  acts  much  as  any  other  increase  in  money  would,  although 
it  may  be  better  to  think  of  it  as  increased  purchasing  power, 
rather  than  as  strictly  money.  The  increased  purchasing  power 
thus  put  into  circulation  continues  to  pass  from  hand  to  hand, 
the  amount  circulating  diminishing  slowly  as  the  various  holders 
take  out  their  profits  on  the  transactions  in  which  it  is  used, 
and  invest  these  profits  in  some  form  of  non-circulating  capital, 
perhaps  in  part  in  the  bonds  themselves,  handled  as  strictly 
permanent  investments.  But  this  is  not  the  whole  story  of  the 
inflation  which  the  notes  and  bonds  cause.  Many  of  the  lenders 
to  the  government  use  these  notes  and  bonds  as  collateral  for 
advances  from  the  banks  and  thus  put  them  indirectly  into 
circulation,  while  a  few  of  the  bonds  and  more  of  the  notes  will 
actually  pass  from  hand  to  hand  as  does  money.  The  only 
difference  between  bonds  and  notes  so  used  and  fiat  money  is 
that  the  latter  circulates  more  easily.  Upon  the  point  that 
government  credit  used  during  war  causes  inflation  there  is  no 
material  difference  of  opinion. 

The  Evils  of  Inflation.  — ■  Nor  is  there  any  difference  of 
opinion  upon  the  point  that  inflation  is  an  evil.  The  new 
purchasing  power  passes  unevenly  into  circulation.  Prices 
rise  irregularly,  wages  lag  behind,  salaries  lag  still  more  behind, 
while  interest  contracts,  which  are  of  course  contracts  for  the 
payment  of  dollars,  pounds,  or  other  units  of  money,  are  un- 
changed and  never  affected  by  the  fact  that  the  dollars,  etc., 
command  less  of  other  things,  especially  of  commodities  and 
labor.  So  some  are  impoverished,  while  others  appear  to  grow 
rich  and  some  actually  do  grow  richer.  Profiteering  arises. 
Profiteering  is  objectionable  because  it  seems  to  measure  how 
much  some  get  rich  without  giving  a  corresponding  return  — • 
undeservedly  as  we  feel.  Inflation  also  tends  to  waste  of 
economic  resources,  the  conservation  of  which  is  essential  to 
the  conduct  of  war.  For  those  who  get  rich  quickly,  or  who 
for  the  first  time  perhaps  in  their  lives  receive  high  wages, 
steady  employment,  and  large  earnings  arc  prone  to  be  lavish 


402  INTRODUCTION  TO   PUBLIC   FINANCE 

spenders  and  high  Hvers.  The  coal  miner  who  bought  a  dozen 
pairs  of  silk  stockings  for  his  wife,  explaining,  "  My  wife's 
going  to  walk  in  silk  while  the  walking's  good,"  expressed  a 
common  human  sentiment.  * 

Heavy  taxation  tends  of  course  to  restrict  consumption. 
Upon  that  point  there  is  no  dispute.  If  the  increased  purchas- 
ing power  which  flows  forth  in  time  of  war  is  largely  taken 
away  from  the  people  again  in  the  form  of  taxes  they  certainly 
cannot  spend  it.  But  we  must  not  forget  that  at  the  same  time 
heavy  taxation  will  cut  down  production.  For  if  by  taxation 
the  spending  power  of  the  people  is  curtailed,  so  is  demand 
curtailed,  and  it  is  of  no  use  to  produce  things  which  will  not 
be  sold.  Those  who  advocate  "  all  taxes,  no  bonds  "  as  a  mode 
of  war  finance  .sometimes  answer  this  point  as  to  curtailment 
of  production  by  saying  that  the  labor  so  set  free  can  be  turned 
into  the  making  of  war  supplies  or  absorbed  in  the  army.  In 
so  far  as  the  army  is  concerned  this  is  true  whether  the  army 
be  recruited  by  conscription  or  by  universal  volunteering,  for 
there  a  direct  war  service  is  rendered  for  considerations  into 
which  the  pay  does  not  enter.  But  unless  conscription  of  labor 
for  industry  is  resorted  to  the  lure  of  high  wages  is  the  only 
effective  method  available  for  getting  war  materials  made. 
Moreover,  we  may  not  forget  that  a  large  part  of  the  lure  of 
high  wages  lies  in  the  fact  that  they  will  buy  something  desired. 
Our  coal  miner  may  have  earned  the  money  used  to  bedeck 
his  wife  in  silk  stockings  by  hard  work,  or  overtime,  for  high 
wages.  Would  he  have  been  as  keen  to  work  hard  if  the  shops 
contained  only  the  coarse  cotton  stockings  she  had  been  ac- 
customed to  ?  This  is  one  very  essential  point  on  which  we  must 
differ  with  our  friends  of  "  all  taxes,  no  bonds."  We  are  pre- 
pared to  admit  that  much  might  be  said  for  conscription  for 
industry.  For  it  does  seem  but  right  that  he  who  stays  home 
and  avoids  the  hardships  and  dangers  of  the  trenches  should 
work  as  hard  as  he  can  without  special  reward.  But  the  essential 
thing  is  to  get  the  work  done,  and  quickly,  and  we  know  that 
high  wages  with  power  to  spend  and  enjoy  them  are  a  powerful 
lure  to  work.     Moreover,  the  other  plan  is  an  experiment  and 


FINANCIAL  AD^IINISTR.\TION  OF  WAR  403 

war  time  is  a  poor  time  to  be  experimenting,  when  failure  in  the 
experiment  would  spell  disaster.  The  method  we  actually  use 
in  war  time  is  to  let  wages  and  prices  go  up,  and  so  lure  some 
men  into  war  industries  while  others  get  busy  providing  the  lures. 
The  well-intentioned  efforts  to  distinguish  between  essential 
and  non-essential  industries  and  to  prohibit  or  frown  down 
upon  the  non-essential  came  to  disaster  not  merely  because 
of  the  inherent  difficulty  of  seeing  how  silk  stockings  for  a 
coal  miner's  wife  could  "  help  win  the  war."  It  failed  because 
it  diverted  a  goodly  amount  of  intelligence  and  energy  from 
actual  production  into  blundering  efforts  which  only  hampered 
production.  The  meddlesome  mischief  makers  who  have  no 
business  of  their  own  save  tending  other  folks'  business  often 
flourish  in  time  of  war. 

This  is,  however,  no  argument  for  deliberately  creating 
inflation.  Inflation  is  an  evil  which  nobody  can  deny.  Some 
of  it  is  attendant  upon  every  war.  It  is  the  large  spending  by 
government  for  purposes  non-economic  which  creates  inflation. 
Some  inflation  will  come  even  under  an  all  taxes  system  were 
such  a  system  possible.  The  point  is  that  an  all  taxes  system 
would  so  hamper  industry  as  practically  to  check  it.  It  would 
put  brakes  on  the  wheels  of  industry  and  dry  up  the  sources 
of  capital,  just  at  the  time  when  all  the  power  the  machinery 
of  production  can  develop  is  needed  to  carry  the  heavy  load  of 
war.  Nor  would  it  necessarily  check  high  prices  for  it  would 
cause  scarcity  of  goods.  Of  the  two  evils,  dear  but  abundant 
goods  and  dear  and  scarce  goods,  the  former  is  clearly  the  lesser. 
Inflation,  while  an  evil,  has  some  merit  in  that  it  does  help 
make  men  work. 

"  All  Taxes,  No  Bonds  "  Impractical.  —  But  the  arguments 
for  "  all  taxes,  no  bonds  "  appealed  not  at  afl  either  to  the 
practical  statesman  or  to  the  practical  business  man.  No 
country  tried  the  experiment.  As  we  shall  see  all  used  bonds 
and  other  modes  of  borrowing  and  limited  taxation  to  what 
was  thought  to  be  a  wise  amount.  It  was  vain  for  the  theorist 
to  argue  that  present  production  is  the  only  possiljle  source  of 
present  expenditure,  that  the  army  cannot  shoot  a  shell  to-day 


404  INTRODUCTION  TO  PUBLIC   FINANCE 

which  is  to  be  made  ten  years  hence,  that  borrowing  postponed 
no  burden  but  merely  shifted  the  burden  about  among  the 
people,  mortgaging  the  future  of  some  to  the  service  of  others. 
The  business  man  still  felt  sure  that  he  could  pay  the  costs  of 
the  war  more  easily  in  instalments  spread  over  many  years 
than  he  could  in  one  lump  sum  down,  and  the  statesmen  and 
parliaments  agreed  with  him.  Somehow  the  proposal  did  not 
seem  practical.  When  a  theory  is  not  practical  it  probably  is 
unsound. 

Borrowing  Does  Draw  upon  the  Future.  — •  The  fallacy  upon 
which  the  "  all  taxes,  no  bonds  "  theory  rests  is  the  denial  of 
the  possibility  of  counting  upon  the  future.  We  cannot  of 
course  eat  wheat  in  January  that  is  not  to  be  harvested  until 
the  next  fall.  But  we  can  and  do  every  January  sell  wheat 
not  even  sown.  That  is,  we  sell  wheat  to  be  grown,  and  sell 
it  at  a  time  when  the  land  on  which  it  is  to  be  grown  is  still 
frozen  solid  and  covered  with  snow.  With  the  proceeds  of 
that  sale  we  can  put  men  to  work,  or  buy  other  goods  for  the 
wheat.  This  is  the  reason  for  and  the  nature  of  credit,  namely, 
that  it  brings  down  to  us  out  of  the  future  the  value  of  future 
products,  although  not  the  products  themselves.  If  this  is 
unreal,  if  credit  is  not  real,  all  business  is  a  mere  dream,  a  fig- 
ment of  the  brain.  For  there  is  no  transaction  and  no  economic 
process  that  does  not  involve  some  passage  of  time.  If  the 
interval  between  delivery  and  payment  is  short,  we  call  the 
transaction  a  cash  transaction,  if  longer,  a  time  transaction. 
But  so  long  as  the  sun  rises  and  sets,  so  long  as  time  must  elapse 
between  the  sowing  of  seed  and  the  harvest,  so  long  as  men  eat 
three  times  daily  throughout  life  and  not  once  only  for  a  whole 
lifetime,  so  long  will  there  be  a  need  for  credit,  and  so  long  will 
credit  be  something  real  and  be  the  powerful  reality  that  it  is. 
As  applied  in  the  "  all  taxes,  no  bonds  "  arguments  for  war 
finance  the  claim  that  we  can  use  only  present  goods  to  wage 
a  present  war  assumes  that  we  drop  all  production,  use  our 
present  stock  of  food  and  the  like,  and  busy  ourselves  solely 
with  fighting.  Instead  of  that  some  stay  behind  and  "  keep  the 
home  fires  burning,"  while  the  others  fight.     Nor  can  we  draw 


FINANCIAL   ADMINISTRATION  OF  WAR  405 

very  deeply  on  accumulated  capital.  Capital  is  continually 
wasting  and  continually  being  replaced.  Its  upkeep  is  essential 
for  continued  production  and  to  keep  an  army  fed  and  armed. 

It  is  useless  to  deny  that  we  can  mortgage  the  future,  make 
the  future  pay  for  current  war  costs,  for  we  do  it,  and  have 
done  it  repeatedly.  It  is  useless  to  say  "  the  future  is  not  here 
to  bear  burdens,"  that  "  the  surplus  of  current  (sic)  income 
must  be  the  source  (sole  source)  of  funds  for  financing  a  present 
war,  and  hence  that  borrowing  "  postpones  no  burden  to  the 
future."  The  future  is  ours  to  use  as  we  please,  it  will  all  too 
soon  be  "  here  "  ;  "  current  income  "  is  of  no  importance  save 
as  "  current  "  means  "  future,"  even  a  "  present  "  war  runs  on 
for  a  time,  and  since  we  can  bear  no  burden  that  is  past,  we 
can  bear  no  burdens  at  all  save  in  the  future.  The  whole 
argument  reduces  to  a  play  on  words.  It  is  astonishing  that 
it  had  such  currency  and  for  a  time  bewildered  so  many  people. 

Dependence  on  Taxation  Dangerous.  —  Taxation  so  excessive 
as  to  discourage  production  by  leaving  the  producers  no  profits 
and  the  labourers  no  wages,  or  very  small  profits,  and  less  than 
a  living  wage,  will  lose  a  war  very  quickly,  unless  some  other 
incentives  to  industry  are  devised  than  profits  and  wages.  The 
other  incentives  would  have  to  be  found  outside  of  the  field  of 
finance.  No  one  is  able  to  deny  that  they  can  be  found,  but  no 
one  has  yet  found  them,  so  it  is  idle  to  discuss  the  possibility. 

Practically  then,  and  theoretically  as  well,  it  would  be  the 
supreme  height  of  folly  to  wage  war  depending  solely  on  taxation. 
When  we  have  at  hand  so  powerful  a  resource  as  credit  we 
should  use  it  to  make  speed  with  the  war.  Relying  on  available 
taxes  only  means  slow  war  work.  If  your  enemy  follows  the 
other  policy  he  may  win.  If  one  has  a  tractor  he  does  not  use 
a  horse  to  plow  with.  Credit  is  too  powerful  a  war  weapon  to 
be  idly  cast  aside. 

Sec.  6.  Proportion  of  Taxes  and  Loans.  —  Upon  the  question 
of  how  much  of  the  cost  of  war  should  be  borne  by  taxation  and 
how  much  by  borrowing  the  sentiments  and  policy  of  different 
countries  differ.  Germany  says:  none  from  taxation.  Great 
Britain  aims  at  half  and  half.     The  United  States  has  a  theory 


4o6  INTRODUCTION  TO   PUBLIC   FINANCE 

of  raising  enough  by  new  taxation  to  insure  absolutely  the  pay- 
ment of  interest  on  the  new  borrowing  and  thus  to  sustain  its 
credit.  While  poor  France,  whose  wars  have  been  mainly  on 
her  own  soil,  with  one  great  and  glorious  exception,  has  been 
without  theory  because  without  choice,  and  has  been  hard  put 
to  it  to  get  enough  money  from  both  sources  without  regard 
to  proportions.  These  theories  are,  however,  vague,  except 
that  of  Germany,  because  any  fraction  of  an  unknown  quantity 
is  itself  unknown,  and  who  can  forecast  the  cost  of  war  even 
as  of  to-morrow?  Whether  Germany's  theory  rest  on  over- 
confidence  in  winning  and  hence  on  expectation  of  plunder  and 
indemnities,  or  on  the  idea  that  war  itself  places  strain  and 
burden  enough  on  industry  without  the  added  burden  of  taxes, 
it  seems  nevertheless  unsound,  or  at  least  too  full  of  risk.  For 
the  confidence  of  the  lender  in  the  credit  of  the  nation  must 
be  insured  and  conserved,  and  that  is  best  done  by  showing 
him  a  stream  of  revenues  coming  into  the  treasury  out  of  which 
interest  and  principal  as  it  falls  due  can  be  paid. 

Sec.  7.  The  Marginal  Lender  Fixes  the  Credit  of  a  Nation.  — 
The  ultimate  or  marginal  lender  whose  confidence  must  be 
retained  to  the  end,  come  what  may,  may  be,  perhaps,  a  servant 
girl  with  a  few  hundreds  in  the  bank,  a  small  merchant  who  can 
spare  something  from  his  funds,  —  httle  people  by  the  way 
who  can  contribute  in  the  aggregate  much  to  loans  but  who 
would  be  left  out  altogether  on  an  "  all  taxes,  no  bonds  "  pro- 
gram, —  and  others  to  whom  safety  of  the  loan  is  the  prime 
consideration.  If  they  lose  faith,  savings  banks,  insurance 
companies,  and  trust  companies  which  handle  other  people's 
investments  cannot  move,  and  in  turn  others,  bankers  and 
capitalists,  lose  faith  and  the  whole  structure  of  government 
credit  collapses,  or  goes  up  as  if  in  smoke.  To  this  end  a  con- 
tinuous flow  in  taxes  must  be  assured.  It  can  be  assured  only 
by  boosting  taxes  as  fast  as  possible  during  the  early  stages  of 
the  war,  for  when  the  strain  of  war  grows  too  heavy  it  is  hard 
to  get  more  taxes. 

Popular  Loans  by  "Drives." — ^This  suggests  the  value  of 
the  popular  loan  or  subscription  drive.     If  the  government  can 


FINANCIAL   ADMINISTRATION  OF  WAR  407 

go  over  the  heads  of  the  wholesalers  and  middlemen  of  finance 
and  reach  down  to  the  ultimate  investors,  the  real  savers,  it  may 
at  one  and  the  same  time  unlock  vast  stores  of  loanable  funds, 
which  recent  experience  has  shown  to  be  far  larger  than  was 
ever  dreamed  of,  and  create  credit  where  little  or  none  existed 
before.  Many  a  working  man  who  in  ordinary  times  finds  it 
hard  to  borrow  money,  even  for  perfectly  commendable  pur- 
poses, discovered  that  if  he  had  confidence  enough  in  a  govern- 
ment bond  to  buy  it  out  of  his  earnings  there  were  plenty  of 
bankers  and  financiers  who  would  help  him  to  do  so.  He  had 
credit  which  he  could  use  to  aid  his  government.  As  a  matter 
of  fact,  and  a  very  important  fact  too,  the  confidence  of  the 
working  man  in  the  bonds  of  his  government  gave  the  banker 
confidence,  which  otherwise  the  banker  would  never  have  had. 
For  the  banker  argued:  "Here  are  hundreds  of  people  who 
buy  bonds.  Even  if  some  of  these  I  am  helping  to  buy  them 
fail  to  pay  back  my  advances  I  am  safe  because  some  one  else 
will  buy  them.  Since  all  these  people  believe  they  are  good 
I  certainly  need  not  worry."  The  extent  to  which  credit  can 
be  developed  in  this  way  was  strikingly  exhibited  in  all  countries 
during  the  war.  In  Germany,  even  without  the  buttress  of 
new  taxes,  succeeding  popular  loans  brought  out  more  sub- 
scribers and  more  money  than  preceding  ones,  and  the  facilities 
of  banking  intermediate  between  the  ordinary  small  investor 
and  the  government  developed  correspondingly.  It  was  the 
same  in  other  countries.  It  amounted  to  mobilizing  every- 
body's credit. 

Two  lessons  about  popular  loans  stand  out  in  the  experience 
of  the  recent  war.  One  is  that  there  is  danger  of  overdoing 
the  "  drive,"  in  depending  too  much  on  the  patriotic  fervor  of 
volunteer  salesmen  who  in  far  too  many  instances  through 
excess  of  zeal  used  intimidation  and  duress  to  bring  "  our  town  " 
up  to  its  quota.  As  much  harm  can  be  done  to  the  credit  of 
to-morrow  by  duress  in  selling  a  bond  to-day  as  would  result 
from  failure  to  sell.  The  other  lesson  is  that  too  low  interest 
rates  are  false  economy.  The  government  financier  naturally 
prides  him.sclf  on  getting  his  money  cheap.     Th(^re  is  danger 


4o8  INTRODUCTION  TO  PUBLIC   FINANCE 

in  getting  it  too  cheap.  A  discount  or  low  market  price  on 
the  last  issue  hurts  a  new  issue.  Germany  began  its  popular 
loans  at  rather  high  interest  rates.  English  financiers,  who 
began  too  low,  gloated  for  a  while.  But  Germany  placed  its 
second,  third,  and  fourth  loans  each  at  lower  rates  of  interest  — 
that  is  more  advantageously  than  the  one  before  —  while  in 
England  the  rate  of  interest  had  to  go  up.  The  United  States 
played  "  penny  wise,  pound  foolish  "  right  through  the  whole 
series  of  bond  sales,  with  the  result  that  the  subscriber  saw 
bonds  for  which  he  had  not  finished  paying  his  instalments  fall 
in  market  price.  Only  the  early  close  of  the  war  saved  the 
United  States  from  embarrassment.  One  thing  to  be  aimed  at 
in  popular  loans  is  to  put  the  bonds  into  the  hands  of  investors 
who  will  keep  them,  and  by  so  doing  keep  them  out  of  the 
money  markets  and  from  '.-eing  used  as  collateral,  causing 
inflation.  But  when  the  bonds  are  forced  by  intimidation  and 
duress  into  weak  hands  and  when  the  interest  rate  is  too  low 
to  make  them  attractive  investments  for  "  the  widow  and  the 
fatherless  "  they  are  sure  to  come  back  on  the  market,  and  to 
fall  in  price.  All  that  not  only  adds  to  inflation  but  weakens 
confidence,  lessening  credit  for  future  loans.  It  is  so  easy  to 
refund  after  war  is  over,  if  the  government's  credit  is  still  good, 
and  maintaining  high  credit  is  so  vital  to  winning  the  war,  that 
the  saving  of  a  relatively  small  amount  of  interest  at  the  cost 
of  credit  is  distinctly  folly. 

Sec.  8.  Aggregate  War  Costs.  —  The  total  of  war  expen- 
ditures during  the  Great  War  ran  into  enormous  figures.  The 
estimated  cost  to  date  (1920),  not  including  pensions  and 
similar  unsettled  items,  is  placed  at  $200,000,000,000,  taking 
the  inflated  and  discounted  currencies  at  the  old  parity  with 
dollars.  It  has  left  the  belligerents  with  nominal  debts  amount- 
ing to  $240,000,000,000  against  pre-war  debts  of  $29,000,000,000. 
The  accounts  are  still  in  some  confusion  and  the  basis  of  con- 
version cannot  as  yet  be  forecast  owing  to  the  instability  of 
the  currencies,  and  in  some  countries,  notably  Russia,  of  the 
government.  It  is  impossible  as  yet  to  give  statistical  proof 
as  to  the  actual  burden  of  these  debts,  but  it  appears  to  be  true 


FINANCI.\L   ADMINISTRATION  OF  WAR  409 

that  great  as  their  debts  now  are  both  England  and  the  United 
States  have  in  past  generations  borne  a  heavier  burden  of  debt 
than  they  are  now  carrying.  The  British  debt  at  the  beginning 
of  the  nineteenth  century  was  certainly  a  much  heavier  burden 
than  is  her  present  debt,  and  so  was  that  of  the  United  States 
after  the  Revolutionary  War  and  after  the  Civil  War.  England 
was  enabled  to  carry  her  debt  easily  in  the  nineteenth  century 
by  reason  of  the  great  increase  in  productive  power  following 
the  great  inventions  which  caused  the  "  industrial  revolution." 
The  United  States  was  relieved  of  her  Revolutionary  War  debt 
by  the  same  forces  but  more  materially  by  the  development  of 
new  lands  and  other  natural  resources,  and  carried  her  Civil 
War  debt  with  comparative  ease  by  reason  again  of  the  opening 
of  new  lands  and  ever  richer  natural  resources.  Whether  the 
great  World  War  is  to  be  followed  by  a  correspondingly  great 
increase  in  production,  facilitated  by  recent  inventions,  and  the 
exploitation  of  the  resources  of  the  less  mechanically  equipped 
countries  remains  to  be  seen.  The  full  effects  of  the  explosion 
engine,  giving  us  trackless  vehicles,  and  aeroplanes,  lighter 
fuel,  and,  also,  the  greater  use  of  water  power,  the  new  foods, 
better  organisation  of  agricultural  production  and  other  ad- 
vances in  the  technique  of  production  and  transportation  cannot 
yet  be  foreseen.  But  in  face  of  all  this  and  judging  by  the  past 
it  does  not  appear  that  the  war  debts,  enormous  as  they  are,  will 
prove  at  all  an  unbearable  burden. 

We  are,  however,  more  directly  interested  in  the  technique 
of  war  finance  during  the  war  itself  and  in  discovering,  if  we 
may,  what  principles  guided.  We  shall  confine  our  attention 
to  England,  France,  Germany,  and  the  United  States.  The 
opening  of  the  war  threw  the  whole  mechanism  of  finance  out 
of  gear.  Panics,  closure  of  the  stock  exchanges,  moratoria, 
violent  fluctuations  in  the  exchange  rates  or  of  foreign  bills, 
money  shortage,  and  every  other  feature  of  financial  chaos 
prevailed,  both  among  the  belligerents  and  neutrals.  The 
strain  on  the  banking  and  monetary  organisation  of  the  world 
was  relieved  by  drastic  measures.  Liciuidalions  were  post- 
poned,  redemption  of   notes   in   gold   suspended,  government 


4IO  INTRODUCTION  TO  PUBLIC   FINANCE 

guarantees  of  private  bills  were  granted,  paper  money  issues 
were  resorted  to,  and  the  banks  were  combined  all  in  the  effort 
to  create  new  means  of  settlement  and  in  belligerent  countries 
to  provide  the  governments  with  the  means  of  payment. 

England 

Sec.  9.  The  Last  Pre-war  Budget.  —  England's  fiscal  year 
ends  March  31st,  and  the  budget  for  the  next  year  is  usually 
settled  shortly  thereafter.  In  19 14  the  budget  for  the  year  was 
approved  in  June,  about  a  month  before  the  war  broke  out. 
That  budget  had  provided  for  some  new  taxes.  But  a  new 
budget  was  introduced  in  the  middle  of  November  and  for 
several  years  England  had  a  budget  every  sLx  months.  The 
usual  orderly  procedure  of  "  estimates  "  presented  and  "  votes  " 
granted  had  to  be  abandoned  in  fact,  though  the  form  was 
preserved  and  "dummy"  estimates  presented.  During  1914, 
until  the  second  budget  was  approved,  England  financed  the 
war  on  votes  of  credit  to  the  government,  which  then  obtained 
the  funds  granted  by  the  discount  through  the  banks  of  Ex- 
chequer Bills.  By  various  devices  including  the  issue  of  what 
was  practically  fiat  money,  by  guarantee  of  bills  of  exchange 
and  the  other  measures  the  government  made  mobile  the 
reserves  of  the  banks  upon  which  it  had  to  draw. 

The  First  War  Budget.  —  In  November  came  the  first  war 
budget  and  the  income  tax  rates  were  doubled,  and  new  duties 
were  imposed  on  beer  and  tea.  Not  until  November  was  there 
a  funded  loan.  This  consisted  of  £350,000,000,  authorised 
public  stocks  and  bonds  payable  1925-1928  and  sold  on  prac- 
tically a  4  per  cent  basis.  A  guarantee  by  the  Bank  of  England 
to  lend  on  them  up  to  95  at  any  time  within  the  next  three  years 
helped  the  sale  of  what  was  thought  of  as  a  popular  loan,  al- 
though not  placed  by  the  "  drive  "  method.  About  the  same 
time  five-year  Exchequer  bonds  were  resorted  to  and  heavy 
advances  were  obtained  from  the  Bank  of  England. 

The  First  Great  Loans.  —  In  191 5-16  the  expenses  mounted 
fast.  The  second  war  budget  adopted  in  May  was  preceded 
and  followed  by  irregular  "  votes  of  credit."     Resort  was  had 


FINANCIAL  ADMINISTRATION  OF   WAR  411 

to  the  continuous  sale  of  Exchequer  bills.  But  by  June,  1915, 
it  became  necessary  to  fund  the  great  and  growing  mass  of 
floating  debt.  The  interest  rate  on  this  loan  was  raised  as 
compared  with  that  of  the  prior  loan,  but  exemption  from 
income  tax,  which  the  first  loan  enjoyed,  was  not  granted  sub- 
scribers to  this  loan.  The  loan  had  no  fixed  limit  as  to  amount. 
It  was  popularised  by  off'ering  small  denominations,  by  sales 
through  post-offices  and  through  trades  unions  of  small  vouchers 
redeemable  in  bonds.  Holders  of  previous  issues  including 
pre-war  issues  were  allowed  to  exchange  their  holdings  for 
these  bonds  and  there  was  a  promise  that  if  any  subsequent 
issues  have  a  higher  rate  of  interest,  conversion  would  be  per- 
mitted. The  bonds  were  callable  in  ten  years  and  payable  in 
thirty  years.  The  issue  was  a  fair  success  although  it  did  not 
reach  the  great  mass  of  possible  small  subscribers  and  so  failed 
to  disclose  in  full  the  borrowing  power  and  credit  of  the  govern- 
ment. Again  the  mass  of  Exchequer  bills  rolled  up.  The 
failure  of  the  government  to  go  right  down  to  the  bottom  and 
place  this  loan  with  the  ultimate  subscriber  hampered  its  next 
effort,  which  was  to  borrow  in  the  United  States  by  issuing  a 
loan  on  the  joint  credit  of  England  and  France.  An  offering  of 
$1,000,000,000  found  no  market,  and  after  some  negotiations 
one  of  half  that  amount  was  underwritten  in  New  York  con- 
sisting of  5  per  cent  bonds  due  in  five  years  at  98. 

Even  though  backed  by  two  great  countries,  and  paying  a 
very  high  rate,  the  bonds  had  in  large  part  to  be  used  to  pay 
munition  firms  furnishing  supplies.  It  seems  probable  that 
had  the  strength  of  England's  credit  with  her  own  people  been 
better  shown  in  the  preceding  loan  far  better  terms  and  an 
easier  sale  of  the  New  York  loans  would  have  been  achieved. 

New  Taxation.  —  In  September,  1915,  new  taxation  was 
resorted  to  with  vigor.  Mr.  McKenna,  at  once  the  firmest  and 
boldest  chancellor  the  British  Exchequer  ever  has  had,  pre- 
sented a  budget  which  the  London  Economist  described  as: 
"  A  plain  unvarnished  statement  of  unparalleled  revenues,  an 
inconceivable  expenditure,  and  an  unimaginable  deficit,  fol- 
lowed by  a  list  of  fresh  taxation  which  imposed  an  un])recc- 


412  INTRODUCTION  TO   PUBLIC   FINANCE 

dented  burden  on  the  country."  This  fresh  taxation  redeemed 
the  waning  credit  and  followed  by  similar  drastic  measures  put 
British  war  finance  on  a  stable  basis,  until  May,  191 7,  when  the 
whirl  of  politics  threw  the  Exchequer  into  the  hands  of  Mr. 
Bonar  Law  and  disorder  and  weakness  set  in.  The  normal 
income  tax  went  to  35.  6d.,  or  17.5  per  cent,  the  abatements 
were  reduced,  the  supertax  was  raised.  A  war  or  excess  profits 
tax  was  introduced  with  a  50  per  cent  rate.  The  customs  and 
excise  duties  were  increased.  Tea,  cocoa,  coffee,  chiccory,  dried 
fruits,  tobacco,  and  sugar,  motor  spirits  and  patent  medicines, 
cinema  films,  watches,  musical  instruments,  and  imported 
motor  cars  were  the  chief  contributors.  The  postal  and  tele- 
graph rates  were  raised.  The  Chancellor  set  himself  firmly 
against  a  multitude  of  small  taxes  which  would  raise  more 
trouble  than  revenue  and  struck  hard  at  things  of  wide  con- 
sumption, selecting  those  on  which  the  cumulating  expense  of 
frequent  shifting  would  probably  be  the  least.  Despite  all  this 
the  debt  rolled  up,  for  the  war  expenses  still  grew  apace.  Full 
three-fourths  of  the  entire  expenditures  was  being  met  by  loans. 

Still  Heavier  Taxation.  —  In  1916-17  the  taxing  chancellor, 
Mr.  McKenna,  brought  in  a  new  budget  in  April.  Once  more 
the  income  tax  was  raised,  this  time  to  55.,  and  the  lower  reaches 
were  also  strengthened.  The  lowest  rate  was  £1  per  annum, 
which  fell  on  earned  incomes  of  £131  per  annum.  Again  taxa- 
tion was  driven  downward  to  the  great  masses  who,  as  Bis- 
marck once  remarked,  "  bring  in  the  revenue."  The  result 
exceeded  estimates.  The  excess  profits  tax  was  raised  to  60 
per  cent.  Again  were  the  customs  and  excises  raised.  New 
taxes  fell  on  table  waters  and  other  beverages.  Amusements 
were  made  to  contribute. 

Varied  Assortment  of  Loans.  —  Still  the  debt  rolled  up. 
Exchequer  bonds  were  invented  to  supplement  exchequer  bills, 
pubhc  stocks,  and  bonds.  The  market  became  so  glutted  that 
interest  went  to  6  per  cent.  Never  was  the  investor  offered 
such  a  varied  assortment  of  public  notes  and  securities.  The 
Bank  of  England  was  again  drawn  upon.  So  many  purchases 
were  being  made  in  the  United  States  that  difficulty  was  en- 


FINANCIAL   ADMINISTRATION  OF  WAR  413 

countered  in  getting  credits  over  into  the  United  States  in 
quantities  sufficient  to  make  payments.  The  exports  of  Great 
Britain  were  not  sufficient  to  carry  the  flood  of  purchase  money 
needed.  Negotiations  were  then  entered  into  with  Enghsh 
holders  of  American  securities  to  pass  them  over  to  the  govern- 
ment, by  loan  if  not  by  sale.  These  securities  were  then  either 
sold  in  the  United  States  or  used  as  collateral  for  loans,  and  the 
proceeds  of  both  methods  of  handling  them,  turned  into  credits 
in  the  United  States,  were  used  to  pay  the  government's  bill 
with.i  To  force  the  holders  to  surrender  their  American 
securities  a  penalty,  called  a  tax,  of  10  per  cent  on  the  income 
therefrom  was  placed  on  holders.  This  device  facilitated  loans 
in  the  United  States,  although  the  demonstration  of  England's 
credit  with  her  own  people  at  home,  which  had  come  since  the 
first  expedition  to  the  New  York  money  market,  also  helped. 
A  third  great  funded  war  loan  came  in  January,  191 7.  This 
time  a  tax-free  bond  at  4  per  cent  sold  at  par,  and  a  bond  the 
interest  on  which  was  subject  to  the  income  tax,  but  paying 
5  per  cent  and  sold  at  95,  were  offered  side  by  side.  The  people 
bought  the  taxable  bond.  Whether  this  is  evidence  of  the 
falseness  of  the  theory  that  the  tax-free  bond  is  used  for  tax 
dodging,  or  whether  the  spread  in  price  was  too  great,  one  can- 
not say.  About  a  billion  pounds  of  this  loan  was  sold  to  nearly 
5,300,000  subscribers.  It  was  a  clear  victory  for  the  theory 
that  a  fair  rate  of  interest  is  potent. 

The  Darkest  Days.  —  The  last  two  years  of  the  war,  191 7-19, 
may  be  covered  together.  Under  the  administration  of  Mr, 
Bonar  Law  the  government  lost  control  of  the  finances.  It 
settled  down  to  a  policy  of  merely  meeting  its  most  urgent 
obhgations  as  they  arose,  drifted  rudderless  from  one  loan  to 
another,  in  short,  it  lived  strictly  from  hand  to  mouth  with  no 
thought  or  provision  for  the  morrow.  It  was  the  darkest 
period  financially  in  the  entire  history  of  England.  Two  un- 
fortunate   expressions    of    incompetence    flamaged    England's 

•  This  brief  statement  is  correct  only  as  to  the  princijjlcs  followed.  The  details 
varied  so  often  that  a  full  statement  would  take  too  much  space.  As  to  the  10 
per  cent  penalty  tax  mcntionetl  in  the  next  sentence  we  have  no  real  information 
or  understanding.     As  bald  fact  it  seems  to  be  correct,  although  mysterious. 


414  INTRODUCTION  TO  PUBLIC   FINANCE 

credit.  One  was  to  the  effect  that  the  government  did  not 
want  to  be  bothered  with  new  taxes,  it  had  not  a  force  large 
enough  to  collect  them  as  it  was ;  and  the  other  was  that  Eng- 
land would  have  to  depend  upon  advances  from  the  United 
States  as  her  own  resources  were  exhausted.  In  May,  191 7,  an 
increase  was  made  in  the  tax  on  tobacco  and  the  excess  profits 
tax  was  raised  to  80  per  cent.  The  next  year  the  government, 
forced  by  popular  clamour,  raised  the  income  tax  to  65.  and 
the  supertax  to  45.  6J.,  again  raised  the  taxes  on  tobacco  (to 
Ss.  2d.  a  pound),  on  sugar  (to  25^.  Sd.  per  cental),  doubled  the 
tax  on  spirits,  beer,  and  matches,  put  a  stamp  duty  on  checks, 
and  raised  postal  rates,  and  finally  established  a  complicated 
luxury  tax,  a  scheme  of  very  uncertain  value. 

The  Errors  of  British  Finance.  —  Looking  back  we  may  say 
that  England  started  her  tax  poUcy  too  slowly,  that  by  too  heavy 
leaning  on  the  banks  and  failure  to  reach  down  to  the  ultimate 
lender  at  an  early  stage  of  the  war  she  hurt  her  credit.  She 
recovered  and  reached  a  sound  condition  under  the  bold,  firm 
hand  of  Mr.  McKenna ;  and  the  collapse  during  the  last  two 
years  was  due  not  to  anything  in  the  difficulties  of  a  military 
character,  for  they  were  actually  costing  less,  but  to  the  failure 
to  observe  the  principles  of  steadily  increasing  taxation,  and  of 
steadily  drawing  more  and  ever  more  from  popular  loans. 
The  taxpaying  power  of  a  great  nation  grows  as  its  day  of 
need  grows,  and  its  lending  power  is  inexhaustible,  so  long  as 
confidence  is  not  abused,  and  the  people  are  permitted  direct 
access  to  the  loan  bureau.  The  over-dependence  on  short 
notes  financed  through  the  banks  caused  unnecessary  inflation, 
and  an  expense  to  the  government  itself  through  that  inflation 
far  in  excess  of  the  interest  which  was  saved  by  the  low  rates 
of  interest  on  bonds  before  the  last  years.  The  greatest  menace 
to  the  establishment  and  continuance  of  sound  finance  is  that 
most  natural  hope  and  expectation  that  the  war  will  soon  be 
over,  an  expectation  that  discourages  vigorous  measures. 
Surely  it  must  be  clear  that  too  much  taxation,  too  strong  credit, 
are  impossibilities  in  face  of  a  continued  war  and  easily  remedied 
if  need  be  when  the  war  stops. 


FINANCI.\L   ADMINISTRATION   OF  WAR  415 

France 

Sec.  10.  France  Had  Past  Deficits  to  Meet.  —  For  many 
years  before  the  war  France  had  been  running  behind  financially. 
Budget  after  budget  resulted  in  a  deficit.  Just  before  the  war 
broke  out  France  was  engaged  in  floating  a  large  loan  to  adjust 
and  fund  the  accumulated  deficit.  This  loan,  consisting  of 
3^  per  cent  twenty-five  year  bonds  offered  at  91,  was  not  going 
very  well.  The  deep  underlying  reason  for  the  lack  of  interest 
in  this  loan  was  the  tax  system  of  France,  which  was  composed 
largely  of  customs  and  other  indirect  taxes  and  some  anti- 
quated direct  taxes  which  tied  the  central  revenues  to  the  local 
revenues,  and  the  reluctance  to  levy  new  taxes.  After  years  of 
debate  France  had  decided  to  le\^  an  income  tax,  and  such  a 
tax  had  been  adopted  in  1914,  to  take  effect  in  191 5.  It  was 
hoped  that  it  would  support  the  new  loan  and  ultimately  do 
away  with  the  ever  recurring  deficits.  The  new  tax  was,  how- 
ever, a  very  Uttle  one,  with  a  2  per  cent  rate  and  liberal  exemp- 
tions. For  reasons  difficult  to  understand  France  did  not  take 
advantage  of  this  new  tax  to  obtain  war  revenues,  at  first. 
Instead  she  postponed  the  levy  from  1915  to  1916,  and  not  until 
19 1 7  did  she  raise  the  rates. 

The  War  Caused  Loss  of  Revenues.  —  The  revenue  situation 
was  also  complicated  and  badly  hampered  by  the  operations  of 
the  war  itself.  Trade  was  very  seriously  cut  off.  This  reduced 
the  customs  revenues,  one  of  the  mainstays  of  the  government. 
Some  of  the  richest  territory  was  invaded,  and  that  halted  the 
direct  taxes.  In  1916  and  1917  taxation  was  taken  seriously  in 
hand,  and  some  reforms  were  made.  Meanwhile  the  revenues 
fell  oil.  If  we  may  take  1913  as  normal,  the  following  figures 
show  the  run  of  revenues  in  miUions  of  francs:  1913,  5000; 
1914,  4000;  1915,  3800;  1916,  4800;  1917,  6300;  1918,  6500. 

New  Taxation.  —  Beginning  in  1916  new  taxation  was  im- 
posed, increasing  in  severity  each  year.  We  list  the  new  taxes 
without  reference  to  years.  The  most  important  were  an 
excess  profits  tax,  and  an  increase  in  the  rates  of  the  income 
tax.     Then  there  were :  a  special  tax  on  males  of  military  age 


41 6  INTRODUCTION  TO  PUBLIC   FINANCE 

not  called  to  the  colours ;  double  rates  on  mines  and  on  "  con- 
spicuous waste  "  in  the  form  of  clubs,  carriages,  horses,  etc. ; 
heavier  taxes  on  amusements  and  beverages,  securities,  and 
imports ;  increased  rates  for  postal,  telegraph,  and  telephone 
service ;  a  general  tax  on  business  profits  and  on  gross  receipts 
of  retail  sales ;  and  many  others  including  a  tax  on  luxury. 
The  last-named  tax  is  peculiar.  Luxuries  were  defined  as  con- 
sisting either  of  certain  commodities,  considered  luxuries  per  se, 
or  of  any  commodity  if  regarded  as  high-priced.  Thus  jewelry 
is  defined  as  a  luxury  per  se,  and  imitation  jewelry  was  a  luxury 
when  any  item  cost  over  ten  francs.  This  tax  proved  very 
burdensome,  annoying,  and  unpopular,  but  was  retained  in  1919 
after  amendments.  One  cannot  fail  to  be  impressed  with  the 
large  intermixture  of  sentiment  with  sense  in  the  new  French 
taxes.  Thus,  while  the  luxury  tax  serves  better  as  an  outlet 
for  feelings  than  an  inlet  of  revenue,  the  income  tax  was  kept 
within  the  bounds  of  revenue  rates,  without  the  ornamental 
high  rates  which  other  countries  indulged  in. 

Inflation.  —  In  raising  her  war  funds  France  was  distinctly 
unsuccessful  in  avoiding  those  measures  which  lead  directly 
to  inflation.  She  depended  at  first  almost  entirely  on  ad- 
vances from  the  Bank  of  France  and  even  to  the  end  drew 
largely  on  this  source.  As  the  French  people  do  not  use  a 
check  system,  these  advances  were  in  circulating  bank  notes 
and  the  bank  was  from  time  to  time  authorised  to  raise  the  limit 
of  such  issues  until  at  the  close  of  the  war  the  limit  reached 
40,000,000,000  francs.  Two  other  devices  were  bans  de  la 
defense  nationale  and  obligations  de  la  defense  nationale.  The 
hons  were  interest-bearing  treasury  notes  for  short  terms,  the 
obligations  much  the  same,  but  for  longer  terms.  Both  were 
made  very  attractive  to  small  investors,  interest  was  paid  in 
advance,  and  they  were  in  part  non-taxable.  As  some  of  these 
were  used  for  direct  payments  to  liquidate  government  debts, 
they  came  dangerously  near  being  circulating  money. 

The  First  Defence  Loan.  —  The  pre-war  t,\  per  cent  loan 
dragged  along  into  the  first  part  of  the  war  and  hampered  the 
floating  of  any  new  funded  debt  at  higher  rates.     Finally  as 


FINANCIAL  ADMINISTRATION  OF  WAR  417 

new  funded  debts  became  unavoidable  to  meet  the  rapidly 
growing  floating  obligations,  this  old  debt  was  allowed  to  be 
converted  into  new  issues,  a  proceeding  which  greatly  clarified 
the  atmosphere.  In  November,  1915,  nearly  a  year  and  a 
half  after  the  war  began,  came  the  first  "  National  defence 
loan."  This  was  a  5  per  cent  rente  perpetuelle  sold  at  88.  This 
meant  nearly  6  per  cent  interest  with  a  possible  profit  on  a 
rise  in  price  after  the  war.  It  was  so  attractive  that  the  loan 
was  a  great  success.  In  this,  as  in  subsequent  funded  loans, 
there  was  much  difficulty  in  getting  in  any  new  money,  for  there 
were  so  many  outstanding  bans,  obligations,  and  other  con- 
vertible issues  which  could  be  turned  in.  A  second  war  loan 
of  the  perpetuelle  type  came  in  1916.  In  191 7  a  twenty-five 
year  rente  was  used.  But  in  1918  the  government  returned  to 
a  perpetuelle  rente.  These  four  loans  were  all  the  funded  loans 
that  were  issued  while  the  war  continued. 

The  Anglo-French  Loan  and  Collateral  Loans  in  the  United 
States.  —  France  participated  in  the  Anglo-French  loan  floated 
in  New  York  and  described  above.  France,  hke  England, 
made  vast  purchases  of  supplies  in  the  United  States.  Since 
there  was  no  counter  current  of  exports  from  France  to  the 
United  States,  difficulty  was  experienced  in  getting  hold  of 
credits  in  the  United  States  in  which  to  pay  these  bills.  So 
the  government  endeavoured  to  gather  up  securities  which 
could  be  sent  over  as  collateral  for  loans.  In  gathering  these 
from  her  own  people  France  pursued  a  different  policy  from  that 
of  England.  Instead  of  taxing  them  unless  they  were  lent  to 
the  government,  France  tried  to  lure  them  in  by  paying  25  per 
cent  extra  on  the  income  they  yielded.  The  effort  resulted  in 
some  degree  of  success  and  some  loans  were  secured  in  this 
way.  Finally  France. received  advances  from  the  governments 
of  Great  Britain  and  of  the  United  States. 

Debt  Charges  Exceed  Revenues.  —  Toward  the  end  of  the 
war  the  interest  charges  on  the  debt  rolled  up  so  fast  and  became 
so  large  that  they  equalled  the  sum  of  all  revenues.  This  was  a 
condition  fraught  with  great  danger  and  one  very  embarrassing 
in  straightening  out  the  finances  after  the  war. 


4l8  INTRODUCTION  TO  PUBLIC   FINANCE 

Germany 

Sec.  II.  The  Gold  "War-Chest"  and  Other  Financial 
Preparedness.  —  From  the  days  of  Frederick  the  Great,  Ger- 
many has  always  had  a  "  war-chest,"  consisting  of  a  sum  of 
gold  stored  in  the  Julius  Tower  at  Spandau.  She  has  also  had 
a  far  greater  "  war-chest  "  in  the  form  of  carefully  prearranged 
plans  for  borrowing  in  the  event  of  war.  These  plans  include 
arrangements  for  speedily  mobilising  all  the  financial  resources 
of  the  banks  and  of  the  people,  reaching  all  the  way  down  to  the 
peasants  and  the  workers,  who  are  provided  means  to  pledge 
any  property  or  resources  they  may  have  if  it  be  necessary  so 
that  they  may  subscribe  to  the  public  loans.  Finally,  while 
not  ordinarily  intending  to  increase  her  taxes  during  the  war, 
but  to  depend  on  loans  primarily,  Germany  has  sustained  at 
all  times  under  the  Prussian  rule  so  large  a  military  establish- 
ment that  "  war  taxes  "  were  in  fact  always  in  force.  In  1913 
a  special  "  Wehrbeitrag,"  or  defence  contribution,  had  been 
levied,  which  may  also  be  looked  upon  as  a  part  of  the  "  war- 
chest."  These  measures,  as  part  of  her  preparedness  for  war, 
explain  in  large  measure  why  she  could  be  so  apparently  indif- 
ferent to  increased  taxation  during  war.  Whereas  other 
countries  had  to  stop  and  create  the  financial  machinery  of  war, 
Germany  had  it  all  ready  and  had  so  had  it  in  large  part  always. 
Furthermore,  as  part  of  "  preparedness  "  Germany  had  plans 
whereby  at  the  outbreak  of  war  the  so-called  "  civil  budget  " 
was  at  once  contracted,  thus  setting  free  funds  for  war  pur- 
poses. It  is  difficult  to  say  how  much  of  this  contraction  in 
the  civil  budget  is  bookkeeping  and  how  much  is  actual  econ- 
omy. For  some  of  the  saving  is  probably  achieved  by  switch- 
ing certain  salaries  and  other  expenses  from  the  civil  to  the  war 
establishment. 

The  Loan  Bureaus.  —  This  prepared  programme  worked  with 
great  smoothness.  The  banks,  which  are  also  included  in  the 
prearranged  system,  made  the  first  advances.  These  advances 
were  supported  by  their  large  gold  reserves  and  by  the  transfer 
of  so  much  of  the  gold  in  the  Julius  Tower  as  was  not  at  once 


FINANCIAL  ADMINISTRATION  OF  WAR  419 

spent,  and  by  other  measures  increasing  their  lending  ability. 
Then  "  loan  bureaus  "  opened  up  all  over  the  country.  These 
operated  under  laws  originating  in  1848  and  improved  from 
time  to  time.  They  made  advances  to  the  people,  who  in  turn 
lent  the  money  to  the  government,  upon  securities,  merchan- 
dise, and  later  other  collateral  not  ordinarily  available  for  loans. 
These  loan  bureaus  freed  the  Reichsbank  and  other  banks 
under  it  from  a  large  part  of  the  strain  of  financing  the  people's 
offerings,  although  of  course  the  big  banks  had  to  support  the 
"  loan  bureaus."  But  their  advances  were  secured.  The 
Reichsbank  was  thus  in  good  shape  to  discount  treasury  notes 
and  furnished  the  government  its  early  needs. 

The  Popular  Loans.  —  The  first  funded  loan  came  in  Septem- 
ber, 1914,  and  others  followed  at  intervals  of  six  months.  It 
was  thrown  open  to  popular  subscription.  The  rate  of  interest 
was  high,  5  per  cent  on  bonds  sold  at  97^,  and  the  notes  and 
bonds  were  available  in  small  denominations,  as  low  as  100 
marks.  There  were  five-year  notes  and  ten-year  bonds.  The 
loan  was  a  success.  The  short-term  obligations  then  out- 
standing were  cleaned  up,  and  there  was  nothing  in  the  way  of 
embarrassing  immediate  claims  arising  for  nearly  six  months. 
In  this  first  loan  there  was  no  insistence  upon  reaching  the 
ultimate  subscriber  and  the  banks  and  other  financial  institu- 
tions took  part  directly  as  well  as  the  people.  We  may  now 
summarise  the  subsequent  funded  issues.  They  were  like  the 
first,  but  with  dates  of  maturity  strung  along  so  as  to  avoid 
embarrassing  accumulations  in  any  one  year.  The  high  in- 
terest rate  was  maintained  and  there  was  no  fall  in  the  price 
of  issue.  In  fact,  several  of  the  loans  brought  a  better  price 
even  than  the  first.  The  number  of  subscribers  increased, 
although  with  considerable  up  and  down  fluctuation,  being 
somewhat  affected  by  the  situation  of  the  banks  and  their 
ability  to  take  large  sums.  The  March,  191 7,  loan,  the  sixth 
in  order,  reached  7,000,000  subscribers,  which  was  the  maxi- 
mum;  the  eighth,  in  March,  1918,  reached  6,500,000.  The 
ninth,  in  September,  1918,  however,  fell  off  heavily,  both  in 
number  of  subscribers  and  in  amount. 


420  INTRODUCTION  TO  PUBLIC   FINANCE 

Financial  Pyramiding.  —  This  success  with  popular  loans  was 
achieved  by  the  Rcichsbank-Darlehnskassen  or  loan  bureaus. 
The  workings  of  this  system  are  described  by  Bogart,  quoting 
from  a  German  newspaper,  as  follows : 

"  If  you  hold  securities  you  will  find  it  easier  still  to  raise 
money.  It  is  not  necessary  to  sell  them ;  you  simply  borrow 
money  against  them  at  any  Reichsbank-Darlehnskasse  or  at 
any  large  bank,  and  as  you  will  receive  almost  as  much  interest 
on  the  war  loan  stock,  or  even  more  interest  than  you  pay  to 
the  lending  bank,  you  will  be  nothing  out  of  pocket.  You 
must,  however,  hand  over  to  the  bank  the  securities  against 
which  the  money  is  advanced  to  you,  and  the  bank  will  return 
them  when  the  loan  is  paid.  No  loss  can  ensue  from  the  above 
mentioned  procedure,  or  at  the  most,  it  could  only  be  \  per 
cent  per  annum  in  the  interest,  if  as  is  the  case  with  the  '  Reichs- 
Darlehnskassen '  you  pay  5^  per  cent  interest  on  the  borrowed 
money  whilst  you  receive  5  per  cent  on  the  war  loan  stock; 
and  even  this  possible  loss  will  subsequently  be  made  good  in 
view  of  the  fact  that  you  pay  only  99  marks  for  each  100 
marks  of  war  loan  stock,  which  100  marks  will  be  repaid  in 
full. 

"  If  you  have  already  subscribed  to  the  first  or  second  war 
loan  and  paid  in  full  for  the  same,  you  can  at  once  participate 
in  the  present  issue.  All  you  need  to  do  is  to  take  your  stock  — 
or,  if  you  have  not  yet  received  the  stock,  the  receipt  for  the 
amount  paid  —  to  a  bank,  which  will  advance  you  75  per  cent 
of  the  nominal  value,  so  that,  if  you  have  M400  ($100)  old  war 
loan,  you  can  subscribe  M300  in  the  new  issue  without  paying 
a  single  pfennig,  you  can  even  subscribe  four  times  this  amount, 
i.e.  Mi6co  ($400)  if  you  will  also  leave  with  the  bank  the  stock 
that  you  take  in  the  new  loan,  in  which  case  you  will  have 
given  the  bank  as  security  M400  of  the  old  war  loan  and  Mi 200 
of  the  new  war  loan,  together  Mi 600  against  a  loan  of  Mi 200." 

This  system  involves  a  sort  of  pyramiding  by  turning  gov- 
ernment credit  back  into  private  credit.  Germany  floated  one 
small  loan  of  $10,000,000  in  the  United  States.  Being  de- 
barred from  purchasing  abroad,  she  was  under  less  necessity 


FINANCIAL   ADMINISTRATION  OF  WAR  42 1 

than  were  France  and  England  of  establisiiing  credits  in  the 
United  States. 

New  Taxation.  —  But  the  German  pre-war  plan  to  depend 
upon  pre-war  taxes  was  departed  from.  In  19 16  Germany- 
could  not  resist  the  seductive  war  profits  tax,  and  increased 
some  of  her  other  taxes  as  well.  In  191 7  the  colossal  costs 
made  still  further  new  taxes  necessary.  But  the  new  taxes 
were  slow  to  yield  a  return.  Still  further  taxation  was  imposed 
in  1918,  by  which  time  the  imperial  revenues  were  nearly 
double  those  of  1916-17.  Toward  the  end  of  the  war  the 
interest  charges  were  just  about  equal  to  the  entire  revenues. 

United  States 

Sec.  12.  The  Unpreparedness.  —  Despite  the  fact  that  war 
had  been  going  on  three  and  three-fourths  years  before  she  was 
drawn  into  it,  the  United  States  had  made  no  deliberate  financial 
preparation  for  war.  Accident,  not  foresight,  had  placed  in  the 
hands  of  the  federal  government  an  income  tax.  From  19 13  to 
1916  this  tax  had  remained  a  mere  toy,  a  slight  thorn  in  the 
flesh  to  a  few  rich  men,  but  as  for  revenue,  negligible.  There 
had  been  no  adequate  machinery  of  assessment  provided  for 
the  tax,  and  few  of  the  moot  points  of  law  involved  had  been 
settled.  In  the  absence  of  imports  the  customs  system  could 
be  relied  upon  for  little  help,  except  in  so  far  as  it  might  be 
made  the  basis  of  consumption  taxes,  not  protective  in  form. 
A  fairly  well-developed  excise  tax  system  was  all  that  the 
country  had  in  decent  working  order  for  revenues.  Accident 
again,  not  foresight,  a  chance  turn  of  the  political  whirligig, 
had  led  to  an  increase  in  the  rates  of  the  income  tax  in  191 6 
and  to  the  introduction  of  an  estate  tax.  These  series  of  acci- 
dents should  strengthen  our  belief  in  Divine  Providence. 

United  States  Finance  Followed  Correct  Theory.  —  Yet  once 
she  was  in  the  war  the  United  States  lived  up  to  her  best  theory. 
(i)  She  borrowed  at  once  on  long-time  bonds,  (2)  raised  taxa- 
tion to  such  a  level  that  there  could  be  no  question  of  her  abilitj' 
to  meet  debt  charges,  and  (3)  used  treasury  certificates  only  to 
fill  in  the  gaps  between  the  receipts  of  new  taxes  and  the  pro- 


422  INTRODUCTION  TO  PUBLIC   FINANCE 

ceeds  of  new  funded  loans.  Mistakes  there  were  and  many, 
but  none  of  them  were  fatal.  It  was  a  mistake  to  borrow  at 
too  low  rates,  as  shown  by  the  fact  that  after  the  close  of  the 
war  her  bonds  are  heavily  discounted,  and  subscribers  who 
had  not  finished  paying  their  instalments  saw  bonds  on  which 
they  were  still  paying  par  salable  only  at  a  loss.  That  mis- 
take necessitated  the  use  of  duress  in  selling  bonds  and  placed 
them  in  hands  too  weak  to  hold  them.  It  was  a  mistake  to 
place  or  endeavour  to  place  the  great  body  of  taxation  on  the 
rich  and  moderately  well  to  do  and  practically  to  exclude  the 
great  mass  of  the  people  from  participation  in  war  taxes.  It 
was  a  harmless,  but  expensive,  mistake  to  waste  time  and 
energy  on  frivolous  taxes  aimed  at  conspicuous  waste  when 
what  was  so  urgently  needed  was  only  real  revenue-producing 
taxes.  It  was  a  mistake  to  place  treasury  certificates  on  the 
market  in  such  ways  as  were  certain  to  increase  inflation. 

The  Effects  of  Inflation.  —  Owing  to  war  spending  in  the 
United  States  by  the  belligerent  governments,  to  the  issue  by 
European  governments  of  paper  money  and  other  forms  of 
circulating  credit,  to  the  flood  of  gold  poured  into  the  United 
States,  and  to  the  decrease  in  the  world's  production,  creating 
great  scarcity  of  commodities,  the  level  of  prices,  when  the 
United  States  entered  the  war,  was  exceedingly  high.  This 
worked  both  to  the  advantage  and  disadvantage  of  the  govern- 
ment in  financing  for  war.  It  worked  to  the  disadvantage  of 
the  government  in  that  it  had  to  pay  inordinate  prices  for  every- 
thing it  bought.  It  worked  to  its  advantage  because  there  were 
profits,  some  real,  some  on  paper,  which  could  be  taxed.  In- 
dustrial activity  was  great,  employment  good,  and  there  was  a 
flood  of  free  funds  in  the  hands  of  the  people  which  could  be 
taxed  or  borrowed  into  the  treasury.  There  was  a  general 
fluidity  of  resources  which  helped  exceedingly  to  finance  the 
war. 

The  Advantages  of  Having  the  Federal  Reserve  System.  — 
One  great  advantage  which  the  United  States  had  was  the 
recently  organised  Federal  Reserve  system  which  served  in 
two  ways:   first,  as  an   agency  for    the  placing  of    treasury 


FINANCIAL  ADMINISTRATION  OF  WAR  423 

certificates,  and  second,  as  the  basis  of  mobilising  all  the  banks 
not  only  in  support  of  general  financial  measures,  but  for  the 
great  bond  sale  drives.  Through  the  federal  reserve  system 
the  treasur>^  redeposited  its  funds  in  the  banks,  where,  by  reason 
of  the  deposit  credit  system,  they  largely  remained,  although 
passing  from  the  government's  account  to  those  of  contractors 
and  others  to  whom  they  were  paid  by  the  government. 

New  Taxation.  —  In  view  of  what  has  been  presented  else- 
where in  this  book,  all  we  need  do  now  is  to  present  a  summary 
of  the  revenue  measures  and  borrowings.  A  pre-war  muni- 
tions tax  grew  into  the  war  and  excess  profits  tax.  The  income 
tax  was  steadily  increased  and  the  upper  ranges  of  rates  became 
abnormally  high.  The  old  excise  taxes  were  vastly  increased, 
especially  on  liquors  and  tobacco.  Stamp  taxes  came  in. 
Transportation  and  communication  was  taxed,  new  excises  in 
the  form  of  taxes  on  what  was  assumed  to  be  "  conspicuous 
waste,"  or  luxury  spending,  taxes  on  amusement  and  a  mis- 
cellaneous lot  of  others.  Strikingly  absent  were  any  new 
excise  taxes  on  articles  of  wide  consumption,  which  would  fall 
on  the  great  masses  of  the  people. 

Summary.  —  The  Secretary  of  the  Treasury  in  his  report 
for  the  fiscal  year  ending  June  30,  1919,  gives  the  revenue 
receipts  as  follows:  April  6,  1917  to  June  30,  1917,  $567,000,- 
000;  fiscal  year  ending  June  30,  1918,  $3,664,000,000;  fiscal 
year  ending  June  30,  1919,  $5,152,000,000;  June  30  to  October 
31,  1919,  $1,895,000,000;  total  of  foregoing,  $11,280,000,000, 
But  all  these  figures  are  subject  to  revision,  and  reallotment. 
The  disbursements  of  the  corresponding  periods  were :  April  6, 
1917  to  June  30,  1917,  $1,216,000,000;  fiscal  year  ending  June 
30,  1918,  $12,697,000,000;  fiscal  year  ending  June  30,  1919, 
$18,515,000,000;  July  I  to  October  31,  1919,  $2,985,000,000, 
total  of  foregoing,  $35,413,000,000.  These  figures  include 
$9,406,000,000  advanced  to  foreign  governments,  leaving  ex- 
penditures by  the  United  States  during  this  period,  $36,000,- 
000,000. 

The  summary  of  debt  outstanding  October  31,  1919,  was  as 
follows : 


424  INTRODUCTION  TO  PUBLIC   FINANCE 

Old  debt  interest  and  non-interest  bearing     ...          .  $1,120,000,000 

First  Liberty  Loan 1,985,000,000 

Second  Liberty  Loan 3,526,000,000 

Third  Liberty  Loan 3,904,000,000 

Fourth  Liberty  Loan 6,614,000,000 

Victory  Loan 4,414,000,000 

Treasury  certificates 3,736,000,000 

War  savings  certificates  (ex  interest) 911,000,000 

$26,210,000,000 

Adjusting  for  cash  on  hand  and  other  factors  the  net  increase 
in  debt  was  $24,133,000,000,  revenue  receipts  during  the 
war  were  $11,280,000,000,  so  that  the  total  war  disbursements 
were  $35,413,000,000. 

Sec.  13.  Post-War  Financing.  —  What  will  be  done  after 
the  war  to  reorganize  finances  is  an  interesting  subject  of 
speculation.  The  situation  at  first  glance  is  appalling.  The 
peace  time  financial  system  lies  in  ruins  which  appear  to  be  as 
complete  as  those  of  a  bombarded  village.  Debt  charges 
are  in  excess  of  revenues  in  some  countries;  new  current  ex- 
penses as  well  as  heavy  debt  charges  are  found  in  all  countries. 
The  situation  looks  hopeless  to  the  eyes  of  a  people  worn  and 
torn  by  war.  We  may,  however,  have  confidence  that  the 
structure  will  be  restored,  and  perhaps,  like  burned-down  cities 
which,  rid  of  their  slums  and  antiquated  buildings,  rise  more 
beautiful  from  the  ruins,  so  too  the  financial  system  is  likely  to 
be  purged  of  its  dross  and  refined. 

At  first  wild  schemes  will  be  suggested.  Repudiation  of 
debt,  confiscatory  taxes,  capital  levies,  and  other  extremes  have 
already  been  proposed.  But  eventually  calmer  councils  will 
prevail.  The  debts  will  be  consolidated  and  converted  until 
the  interest  charge  is  reduced  to  a  reasonable  minimum.  Taxes 
will  be  found  to  increase  in  yield  as  the  extraordinary  rates 
are  reduced  and  as  industry  strikes  its  new  stride.  Since  high 
prices  will  prevail  for  a  long  time,  the  monetary  expression  of 
taxes  like  that  of  wages  and  prices  will  be  high,  and  by  com- 
parison the  debt  charges  will  be  less  formidable.  The  sheer 
weight  of  taxation  will  compel  to  greater  effort  in  industry 
and  greater  economy  in  spending.     Peoples  who  created  in  all 


FIXANCIAL  ADMINISTR.\TION  OF  WAR  425 

during  five  }-ears  war  goods  and  services  amounting  to  $200,000,- 
000,000  can  do  it  over  again  if  they  will  to  do  so  in  another  five 
years.  There  is  little  that  is  extraordinary  or  necessarily  sur- 
prising in  the  "  great  rapidity  with  which  countries  recover 
from  a  state  of  devastation,"  says  John  Stuart  Mill,  "  the 
disappearance,  in  a  short  time,  of  all  traces  of  the  mischief  done 
by  earthquakes,  floods,  hurricanes,  and  the  ravages  of  war. 
An  enemy  lays  waste  a  country  by  fire  and  sword,  and  destroys 
or  carries  away  nearly  all  the  movable  wealth  existing  in  it ; 
all  the  inhabitants  are  ruined,  and  }'et,  in  a  few  years  after,  every- 
thing is  much  as  it  was  before.  .  .  .  With  the  same  skill  and 
knowledge  which  they  had  before,  with  their  land  and  its 
permanent  improvements  undestroyed,  .  .  .  they  have  nearly 
all  the  requisites  for  their  former  amount  of  production.  .  .  . 
They  will  in  a  short  time  have  raised  as  great  a  produce,  and 
acquired  collectively  as  great  wealth  and  as  great  a  capital,  as 
before;  by  the  mere  continuance  of  that  ordinary  amount  of 
exertion  which  they  are  accustomed  to  employ  in  their  occupa- 
tions." 1 

Sec.  14.  Financing  a  Small  War.  —  The  World  War,  as  we 
have  seen,  forced  some  departures  from  principle.  A  small 
war  may  be  financed  more  strictly  according  to  rule.  No 
better  illustration  of  the  application  of  this  can  be  found  in 
history  than  is  afforded  by  the  operation  of  the  United  States 
treasury  during  the  war  with  Spain.  That  history  is  worth 
study  in  all  its  details. 

The  situation,  as  it  confronted  Secretary  Gage  when  the 
news  of  the  destruction  of  the  Maine  reached  Washington, 
may  be  summarised  somewhat  as  follows:  The  treasury  had 
a  balance  on  hand  of  about  $225,000,000.  But,  as  we  shall  see 
below,  only  about  $25,000,000  of  this  was  really  available 
for  immediate  use  in  the  prosecution  of  the  war.  The  ordinary 
expenditures  of  the  government,  outside  of  those  for  the  postal 
system,  which  was  nearly  self-supporting,  amounted  in  round 

'  Principles,  Bk.  I,  Chap.  V,  sec.  7.  Of  the  "  damn'dest  finest  ruins  in  the  world," 
of  which  San  Francisco  boasted  in  1906,  there  was  in  three  years  scarce  a  scar  re- 
maining. 


426  INTRODUCTION  TO  PUBLIC   FINANCE 

numbers  to  $350,000,000  per  annum.  For  Lhe  first  time  in  many 
months  these  expenses  were  being  nearly  met  by  the  revenues. 
Indeed,  it  was  estimated  that  at  the  ordinary  rate  of  expendi- 
tures there  might  be  a  sHght  surplus  at  the  end  of  the  year. 
The  tariff  was  expected  to  yield  about  $200,000,000,  the  inter- 
nal revenue  taxes  about  $165,000,000,  and  there  were  about 
$25,000,000  to  be  expected  from  miscellaneous  sources. 

The  Tariff  Could  Not  Be  Changed. —The  larger  part  of  the 
income,  however,  came  from  taxes  which  could  not  well  be 
tampered  with.  The  tariff  had  been  so  long  a  subject  of  con- 
troversy that  there  was  little  desire  to  alter  its  recent  settle- 
ment. For  reasons  already  made  clear,  there  were  many  parts 
of  the  tariff  which  could  not  well  be  changed.  Except  in  a  very 
few  instances,  the  income  to  be  obtained  from  it  would  not  be 
increased  by  raising  the  rates.  In  the  great  majority  of  in- 
stances, to  raise  the  rates  would  have  been  to  lessen  the  receipts, 
while  to  lower  those  rates  for  the  purpose  of  increasing  the  in- 
come by  allowing  larger  importations  would  have  been  to  re- 
move the  protection  afforded  by  them.  This  was  contrary  to 
the  avowed  policy  of  the  administration.  It  would,  moreover, 
have  served  to  disturb  industry  and  to  perplex  its  leaders  at  a 
time  already  sufficiently  disquieting,  and  might  have  proved 
but  an  aggravation  of  the  disturbance  caused  by  the  war.  The 
great  body  of  the  customs  rates,  of  which  there  are  thousands  on 
the  tariff  schedules,  are  not  productive  of  much  revenue  and  are 
not  intended  to  be.  They  are  there  to  restrict  importations. 
These  certainly  could  not  well  be  changed.  Of  the  bare  dozen 
or  so  of  articles  of  importation  which  do  yield  a  revenue,  sugar, 
one  of  the  most  important,  was  likely  to  be  interfered  with  by 
the  war.  At  the  existing  rates,  sugar  imported  should  yield  a 
revenue  of  about  $80,000,000  a  year,  but  at  least  half  of  the 
importation  was  jeopardised  by  the  war  itself,  and  it  would 
have  been  highly  impolitic  to  have  changed  the  rate  at  this 
time.  Iron,  which  was  once  a  source  of  considerable  revenue, 
was,  in  consequence  of  the  changes  which  have  taken  place  in 
that  industry  and  of  the  protective  features  of  the  customs 
law,  not  available  to  provide  new  revenues,  as  the  importa- 


FINANCIAL   ADMINISTRATION   OF   WAR  427 

tions  are  at  best  small.  Cotton  goods,  the  tax  upon  which 
yields  considerable  revenue,  were  protected ;  so  were  manu- 
factures of  hemp,  flax,  and  jute,  of  leather  and  of  wool.  Drugs, 
medicines,  and  chemicals  were  already  taxed  up  to  the  limit 
of  productiveness,  from  a  revenue  point  of  view.  In  short, 
there  were  but  four  important  articles  imported  w^hich  might  be 
used  to  yield  additional  revenue.  These  were  hides  and  skins, 
raw  silk,  tea,  and  coffee.  To  tax  hides  and  skins  or  raw  silk 
would,  probably,  under  the  prevailing  theory  of  "  compensa- 
tor}- "  duties,  have  involved  an  increase  in  the  rates  on  the 
products  manufactured  from  them,  to  maintain  the  same  degree 
of  protection  that  those  products  now  enjoy.  That  would  have 
reopened  the  whole  tariff  controversy,  and  have  rendered  the 
outcome  of  the  war  revenue  measure  extremely  doubtful. 
Clearly  it  were  wisest,  considering  how  recently  the  tariff  issue 
had  been  temporarily  settled,  to  leave  them  alone.  As  a  matter 
of  fact,  then,  there  are  only  two  articles  in  the  whole  list  of 
importations  which  might  be  considered  by  the  Secretary  of 
the  Treasury  in  his  search  for  new  income.  These  were  tea 
and  coffee,  which  might,  perhaps,  have  been  made  to  yield 
together'nearly  $80,000,000  additional  revenue.  That  was  ap- 
proximately all  that  could  be  expected  from  the  tariff. 

The  Tax  on  Tea.  —  In  the  war  revenue  bill,  as  presented  to 
the  House  of  Representatives  by  the  committee  on  ways  and 
means,  of  which  Mr.  Dingley  was  chairman,  there  was  no 
suggestion  of  using  the  tariff  in  any  way  for  obtaining  additional 
revenue.  It  was  not  until  the  very  end  of  the  long  discussion 
of  the  measure  in  the  Senate  that  it  was  proposed  to  put  a  duty 
of  ten  cents  a  pound  on  tea.  That  measure  passed  the  Senate 
and  was  accepted  by  the  conference  between  the  two  Houses 
and  by  the  House  of  Representatives  without  any  public  dis- 
cussion as  to  its  merits.  The  reason  for  this  duty,  as  for  the 
omission  of  coffee  from  the  list,  is  therefore  not  clear.  The 
tax  on  tea  was  an  important  matter.  The  yield  would  have 
been  over  $10,000,000  per  annum.  A  similar  tax  on  coffee, 
which  would  have  been  at  the  rate  of  8.5  cents  per  pound,  would 
have  yielded  about  $70,000,000  more.     It  is,  therefore,  some- 


428  INTRODUCTION  TO  PUBLIC   FINANCE 

what  surprising  that  it  should  have  attracted  so  Httle  atten- 
tion from  the  members  of  Congress. 

Internal  Taxes.  —  Since  the  revenue  from  the  tariff  was  not 
to  be  increased,  the  only  resource  available  was  internal  taxes. 
That  these  internal  taxes  should  have  taken  the  same  general 
form  as  the  taxes  used  during  the  Civil  War,  and  consequently 
more  or  less  familiar  to  people  and  officers,  was  but  natural. 
Under  the  stress  of  war  it  is  unwise  to  attempt  to  organise 
entirely  new  taxes,  such,  for  example,  as  an  income  tax.  Though 
an  income  tax  had  been  used  during  the  Civil  War,  that  form 
of  taxation  w^as  under  the  shadow  of  an  adverse  decision  from  the 
Supreme  Court.  Even  if  an  income  tax  law  which  would  have 
been  constitutional,  according  to  the  recent  decision  of  the 
court,  could  have  been  drawn,  it  is  doubtful  whether  it  could 
have  been  made  productive  within  any  reasonable  period  of 
time.  Recourse  might  have  been  had  to  direct  taxes,  appor- 
tioned among  the  states  according  to  population.  These  taxes 
could  then  have  been  raised  in  any  manner  which  the  state 
authorities  chose.  But  there  are  two  fatal  objections  to  this 
plan.  The  apportionment  of  taxes  according  to  population 
is  fundamentally  unjust  and  unequal.  What  it  amounts  to 
practically  is  a  graduated  poll-tax.  The  different  common- 
wealths vary  so  in  wealth  per  capita  that  any  per  capita  tax, 
however  raised,  would  be  unfair.  Although  the  census  estimate 
of  wealth  in  1890  was  anything  but  satisfactory,  yet  the  method 
used  in  that  estimate  was  uniform  throughout  the  country ;  and 
such  differences  as  that  between  South  Carolina,  with  about 
$350  per  capita,  and  Nevada,  with  $4000  per  capita,  show  how 
utterly  inadequate  the  constitutional  method  of  raising  direct 
taxes  has  become.  Then,  again,  the  method  of  taxation  by 
which  most  of  the  states  raise  their  revenues,  and  which  they 
would  probably  follow  in  raising  their  share  of  any  apportioned 
taxes,  is  the  worst  in  use  in  any  civilised  country,  and  the  in- 
justice of  the  apportionment  would  have  been  enormously  in- 
creased by  the  injustice  in  collection.  The  second  objection 
to  this  method  of  raising  direct  taxes  prescribed  by  the 
Constitution  is  that  it  takes  an  inordinate  length  of  time, 


FINANCIAL  ADMINISTRATION  OF  WAR  429 

and  war  taxes  should  begin  to  }'ield  a  revenue  as  early  as 
possible. 

Description  of  the  New  Taxes.  —  The  only  available  plan  was, 
therefore,  to  seek  additional  revenue  from  the  existing,  indirect, 
internal  taxes,  the  excises,  or,  as  they  are  called  in  the  United 
States,  the  "  internal  revenue  "  taxes,  and  to  supplement  these 
still  further  by  new  taxes  of  the  same  sort.  Briefly  summarised, 
the  revenue  bill  nearly  doubled  the  existing  rate  of  taxation 
upon  beer  and  other  similar  fermented  liquors ;  it  imposed 
special  taxes  on  bankers,  brokers,  pawnbrokers,  theatres, 
circuses  and  other  shows,  bowling-alleys,  and  billiard  rooms ;  it 
raised  the  rates  on  tobacco  of  all  kinds ;  and  it  placed  stamp 
taxes  on  stocks  and  bonds,  commercial  papers,  legal  docu- 
ments, checks  and  drafts,  proprietary  medicines,  toilet  articles, 
bills  of  lading,  insurance  policies,  and  a  number  of  other  things. 
Special  direct  taxes  were  imposed  on  the  oil  trust  and  the  sugar 
trust,  and  on  legacies  and  distributive  shares  of  personal  property. 

Yield  of  New  Taxes.  —  As  the  war  revenue  bill  passed  the 

House,   its  probable   yield   was  variously  estimated   at   from 

$90,000,000  to  $105,000,000  per  annum,  the  former  being  the 

better  estimate.     As  amended  in  the  Senate  and  finally  adopted, 

it  promised  to  yield  at  least  $150,000,000  per  annum.     The 

actual  yield  in  addition  to  the  regular  revenue  during  the  first 

month  was  about  $13,000,000.^     But  the  expenses  of  war  during 

the  first  few  months,  if  not  for  a  long  time  after  that,  would  be, 

it  was  estimated,  at  least  double  that  sum  and  possibly  more. 

Therefore,  unless  the  treasury  had  a  considerable  balance  on 

hand,  there  would  have  been  no  possibility  of  conducting  the 

war  at  all  without  immediate  loans.     The  balance  in  the  treasury 

at  the  outbreak  of  the  war  was  $225,000,000.     Upon  this  were  a 

number  of  claims,  some  of  which,  however,  were  not  immediate. 

$100,000,000,  known  as  the  gold  reserve,  had  to  be  held  for 

*  It  is  not  possible,  and  probably  never  will  be  possible,  to  state  exactly  how 
much  the  new  taxes  increased  the  revenues.  In  the  first  place  the  reports  do  nut 
segregate  the  income  obtained  from  the  new  taxes  from  that  obtained  from  the  old  ; 
and  in  the  second  place,  the  changes  in  the  rates  and  the  existence  of  new  taxes  have 
changed  the  yiekl  of  the  older  parts  of  the  system  by  an  amount  which  cannot  even 
be  estimated.  The  total  increase  in  Ulic  revenues  for  the  fiscal  year  1899  over  1898 
was  about  $115,000,000. 


430  INTRODUCTION  TO   PUBLIC   FINANCE 

the  preservation  of  the  parity  of  all  parts  of  the  circulation  and 
the  avoidance  of  general  financial  ruin.  Then  there  were  $13,- 
000,000  of  fractional  silver  and  minor  coins,  a  large  part  of  which 
was  worn  and  unavailable,  while  the  rest  was  needed  for  currency 
purposes  throughout  the  country.  $14,000,000  had  been  re- 
ceived from  the  sale  of  the  Pacific  railroads ;  but  although  this 
sum  was  temporarily  available,  it  would,  if  it  were  spent,  be 
necessary  to  raise  an  equivalent  amount  before  January  i  to 
meet  the  Pacific  Railroad  bonds  which  came  due  at  that  time. 
$33,000,000  were  held  in  trust  for  the  redemption  of  the  notes  of 
national  banks  which  had  failed  or  which  were  redeeming  their 
circulation.  A  part  of  this  was  temporarily  available,  but  it 
would  be  necessary  to  replenish  that  fund  at  an  early  date  if 
much  were  drawn  from  it.  There  were,  then,  out  of  the 
$225,000,000,  $160,000,000,  of  which  a  small  part  only  was  avail- 
able, and  that  but  for  a  short  time.  Anything  drawn  upon  that 
would  have  to  be  replaced  by  January  i  at  latest.  Of  the 
$65,000,000  remaining,  $40,000,000  were  necessary  as  the  cash 
on  hand  for  the  ordinary  operations  of  the  government.  That 
amount  corresponds  to  the  cash  on  hand  which  a  merchant 
keeps  in  the  till  to  make  change  or  to  meet  small  bills.  This 
left  but  $25,000,000  for  the  initial  expenses  of  the  war,  which 
in  the  state  of  unpreparedness  would  naturally  be  above  the 
average.  This  $25,000,000  was  all  the  unincumbered  money 
in  the  treasury  to  meet  the  appropriation  of  $50,000,000  made 
by  Congress  before  war  was  declared.  It  was  clear  that  the 
Secretary  of  the  Treasury  could  not  provide  the  sinews  of  war 
without  the  power  to  borrow,  both  for  a  short  time,  to  anticipate 
the  revenues  expected  from  the  new  taxes,  and  for  a  long  time, 
to  enable  him  to  support  any  naval  and  military  operations 
which  might  become  necessary,  however  extensive. 

Authority  to  Borrow  Granted.  —  After  much  discussion  and 
more  or  less  unnecessar}^  and  dangerous  delay,  especially  in  the 
Senate,  Congress  authorised  the  borrowing,  at  the  discretion 
of  the  administration,  of  not  more  than  $100,000,000  at  one 
time  on  treasury  certificates  and  of  an  amount  not  to  exceed 
$400,000,000,  on   10 — 20  bonds  at  3   per  cent.     Nominally, 


FINANCIAL  ADMINISTRATION  OF  WAR  431 

therefore,  the  Secretary  of  the  Treasury  had  in  his  hands  for 
the  necessities  of  war  during  the  first  six  months  of  its  duration  : 

Surplus  on  hand $  25,000,000 

War  revenues 75,000,000 

Temporary  loans 100,000,000 

Bonds       400,000,000 

Total        $600,000,000 

Practically,  he  was  limited  by  the  fact  that  all  of  this  money 
had  not  been  appropriated,  and  it  would  have  been  folly  to 
raise  more  than  he  had  authority  to  spend.  Including  the 
$50,000,000,  appropriated  before  the  war  broke  out,  the  total 
war  appropriations  made  by  Congress  before  it  adjourned 
amounted  in  all  to  $361,788,095.11.  This  sum  covered  the  most 
generous  estimates  of  the  probable  cost  of  the  war.  But  the 
secretary  did  not  deem  it  necessary  to  raise  at  once  a  sum  equal 
to  the  totai  appropriations.  It  was  estimated  that  the  ex- 
penses for  the  first  six  months  would  not  exceed  $175,000,000,  or 
about  one-half  of  the  appropriations.  The  new  taxes  would 
probably  yield  about  $75,000,000  toward  these  necessities,  and  a 
loan  of  $100,000,000  would  possibly  have  sufficed  to  meet  all 
the  demands.  But  the  treasury  raised  $200,000,000  by  the  sale 
of  3  per  cent  10 — 20  bonds,  obtaining  a  total  of  $275,000,000,  or 
nearly  $100,000,000  in  excess  of  the  probable  actual  expendi- 
ture. The  accumulation  of  this  surplus  was  not  in  any  sense  an 
extravagant  or  useless  piece  of  financiering.  As  has  already 
been  explained,  the  treasury  must  be  prepared  to  meet  any 
demand  that  may  arise,  instantly  and  amply.  That  is  the  im- 
perative necessity.  As  the  early  close  of  the  war  could  not 
have  been  foreseen,  the  fiscal  preparations  were  necessarily 
liberal.  Indeed,  the  amplitude  of  the  funds  available  was  one 
of  the  most  potent  causes  of  the  success  of  the  war.  The  excess 
raised  was  no  larger  than  was  necessary  to  insure  the  instant 
readiness  of  the  treasury  to  meet  all  possible  demands.  Had  the 
war  continued  and  the  demands  equalled  the  appropriations, 
the  treasury  would  have  been  obliged  to  use  its  power  of  borrow- 
ing which  the  fortunate  termination  of  the  war  rendered  un- 
necessary. 


432  INTRODUCTION  TO   PUBLIC   FINANCE 

Sec.  15.  The  Use  of  Credit.  —  It  now  remains  to  see  how  the 
credit  of  the  nation  was  protected  and  how  it  stood  the  strain. 
At  the  end  of  April,  1898,  the  interest-bearing  debt  of  the  United 
States  amounted  in  round  numbers  to  $847,000,000.  $100,- 
000,000  of  this  bore  interest  nominally  at  5  per  cent,  the  balance 
at  4  per  cent.  The  4  per  cent  bonds,  payable  in  1925,  were 
quoted  when  the  plans  were  being  made  for  placing  the  new 
loan  at  117:^.  At  that  rate  they  would  yield  the  investor  3^  per 
cent  interest.  There  was,  therefore,  some  surprise  when  it  was 
proposed  to  place  the  new  loan  at  3  per  cent.  It  was  urged  that 
nobody  would  buy  the  new  bond  at  3  per  cent  when  he  could 
buy  one  of  the  old  ones  and  get  3^^  per  cent.  Yet  the  outcome 
showed  the  wisdom  of  the  move.  The  bonds  were  subscribed  to 
seven  times  over,  and  in  a  short  time  rose  to  a  premium  of  103 
and  105.  In  fact,  the  entire  loan  was  easily  placed  on  far 
better  terms  than  any  nation  has  ever  before  been  able  to  obtain 
in  time  of  war.  This  remarkable  result  was  attained  partly  by 
reason  of  the  fact  that  the  loan  was  offered  for  popular  sub- 
scriptions and  the  bonds  were  for  small  amounts,  thus  creating 
and  reaching  a  new  market  among  investors  of  small  means. 
In  part,  too,  it  was  due  to  the  fact  that  the  new  bonds  at  par 
really  formed  a  better  basis  for  the  national  bank-note  circula- 
tion than  the  old  bonds  at  117^,  and  very  much  better  than  the 
old  bonds  at  123^,  the  price  which  was  reached  before  the  new 
issue  was  completed.  An  investment  by  a  national  bank  of 
$100,000  in  the  old  bonds  at  117^  would  yield  a  profit  of  $736.70 
on  the  circulation,  if  interest  is  at  6  per  cent ;  while  an  invest- 
ment of  the  same  amount  in  the  new  bonds  at  par  would  yield 
a  profit  on  the  circulation  of  $1302.02.  The  difference  in  favour 
of  the  new  bonds  was  $565.32,  or  over  half  of  i  per  cent.  The 
advantage  was  still  greater  when  the  old  4's  reached  127^,  as 
they  did  before  the  close  of  the  war.  None  of  these  influences, 
however,  would  have  had  any  weight  had  it  not  been  that 
new  revenues  sufficient  to  meet  all  debt  charges  and  part  of  the 
war  expenses  had  been  provided. 

A  "  Popular  "  Loan.  —  Much  interest  centres  around  the  suc- 
cessful attempt  to  make  this  a  popular  loan,  and  as  this  was  one 


FINANCIAL  ADMINISTRATION  OF  WAR  433 

of  the  features  which  contributed  to  strengthen  the  credit  of 
the  country  at  this  time,  we  may  examine  it  somewhat  in  detail. 
Congress,  after  much  discussion,  finally  provided  that  these 
3  per  cent  bonds,  "  redeemable  in  coin  at  the  pleasure  of  the 
United  States  after  ten  years  from  the  date  of  their  issue,  and 
payable  twenty  years  from  that  date,"  should  "  be  first  offered 
at  par  as  a  popular  loan  under  such  regulations,  prescribed  by 
the  Secretary  of  the  Treasury,  as  will  give  opportunity  to  the 
citizens  of  the  United  States  to  participate  in  the  subscriptions 
to  such  loan,  and  in  allotting  such  bonds  the  several  subscrip- 
tions of  individuals  shall  be  first  accepted,  and  the  subscriptions 
for  the  lowest  amounts  shall  be  first  allotted."  Before  the  bill 
was  finally  passed,  offers  had  been  made  by  various  banking 
houses  to  take  the  whole  issue  at  a  slight  premium.  Both 
Congress  and  the  administration,  however,  favoured  the  experi- 
ment of  interesting  a  large  number  of  small  property  owners  in 
the  loan,  even  at  a  loss  to  the  government.  It  was  thought 
that  such  a  measure  would  strengthen  the  national  credit  by 
gi\dng  expression  to  the  faith  of  our  own  people  in  the  integrity 
of  the  government.  Other  considerations  of  a  political  character 
also  entered  in,  but  with  them  we  are  not  concerned.  As  a 
financial  measure  for  the  strengthening  and  support  of  the  public 
credit  it  proved  a  phenomenal  success. 

The  bonds  were  issued  in  denominations  as  low  as  $20.  Sub- 
scriptions were  received  through  the  post-office,  and  every 
bona-fide  subscription  under  $500  was  immediately  accepted. 
More  than  half  of  the  entire  issue  was  taken  by  230,000  of  these 
small  subscriptions,  and  no  subscription  of  more  than  $4500 
was  accepted.  In  all  320,000  persons  offered  or  made  sub- 
scriptions, and  the  total  amount  tendered  the  government  was 
$1,400,000,000.  This. rush  for  the  new  bonds  was  not  merely 
a  matter  of  patriotism  or  sentiment.  During  the  progress  of 
the  subscriptions  the  price  of  the  bonds  advanced  first  to  102 
and  finally  to  105  J-.  They  soon  stood  at  about  no.  The 
lucky  individuals  whose  subscriptions  were  accepted  made 
from  3  per  cent  to  5  per  cent  in  a  few  days.  The  pojiularity 
of  these  bonds  was  greatly  enhanced  by  the  standing  offers 


434  INTRODUCTION  TO   PUBLIC   FINANCE 

obtained  by  Secretary  Gage  from  two  syndicates  to  take  the 
entire  loan  or  any  part  of  it  that  was  not  covered  by  the  popular 
subscriptions. 

This  method  of  floating  the  loan  cost  the  government  a 
considerable  sum  of  money.  In  the  first  place  a  possible  pre- 
mium was  lost.  How  much  that  premium  would  have  been 
cannot  be  estimated  because  the  bonds  were  sold  in  a  broader 
market  than  would  have  otherwise  existed.  But  it  would  have 
been  at  least  2  per  cent,  for  even  at  a  higher  rate  the  bonds 
offer  a  favourable  basis  for  national  bank-note  circulation.  That 
is,  at  least  $4,000,000  was  lost  at  the  beginning.  Then  the  cost 
of  handhng  the  loan,  paying  the  interest,  etc.,  is  increased  con- 
siderably by  the  small  size  of  the  bonds  and  the  large  number 
of  holders.  It  is  just  as  much  trouble  to  pay  the  15-cent  coupon 
of  a  $20  bond  as  it  is  to  pay  the  $75  coupon  of  a  $10,000  bond. 
Yet  in  spite  of  all  this,  the  placing  of  the  $200,000,000  loan  of 
1898  was  one  of  the  most  successful  pieces  of  financiering  ever 
accomplished  by  the  government.  It  demonstrated  the  perfect 
solvency  of  the  government;  it  gave  the  country  a  financial 
prestige  which  went  a  long  way  toward  hastening  the  end  of  the 
war;  and  it  so  strengthened  credit  of  the  government  that, 
had  the  war  unfortunately  continued,  it  would  have  been  able 
to  obtain  funds  to  almost  any  amount  on  the  most  favourable 
terms  imaginable.  With  a  3  per  cent  bond  seUing  at  105  during 
the  actual  continuance  of  military  operations,  a  nation  may 
safely  regard  its  credit  as  unimpaired. 

The  final  test  of  the  success  of  the  financial  administration 
of  a  war  is  the  preservation  of  the  public  credit. 


BRIEF   BIBLIOGRAPHY    FOR   SUPPLEMENTARY 

READING 

Adams,  H.  C.     Public  Debts.     N.  ¥.,  1887. 

Adams,  H.  C.     The  Science  of  Finance.     N.  Y.,  i8q8. 

Bastable,  C.  F.     Public  Finance.     3d  ed.,  enl.     The  Macmillan  Co., 

1903. 
BoGART,  E.  L.     Direct  and  Indirect  Costs  of  the  Great  World  War. 

N.  Y.,  1919. 
Bullock,    C.   J.,   Editor.     Selected   Readings   in   Public   Finance, 

Boston,  1906. 
CoBDEN  Club  Essays.    Local  Government  and  Taxation.    London 

and  N.  Y.,  1875. 
CoHN,    G.     System    der   Nationaloekonomie,    2ter    Band,    Finanz- 

wissenschaft.     Stuttgart,  1889.     Partial  Translation  by  Veblen, 

T.  B.     Chicago,    1895.     [Economic  Studies  of  the  University  of 

Chicago.] 
CooLEY,  T.  M.     Law  of  Taxation.     2d  ed.,  enl.     Chicago,  1886. 
CosSA,  L.     Primi  elemente  di  scienza  delle  finanze,  3d  ed.     Milan, 

1882.     Translation  by  Horace  White,  with  notes.     N.  Y.  and 

London,  1891. 
Daniels,  W.  M.     The  Elements  of  Pubhc  Finance.     N.  Y.,  1899. 
DowELL,  S.     History  of  Taxation  and  Taxes  in  England.     4  Vols. 

2d  ed.     London  and  N.  Y.,  1885. 
Ely,  R.  T.,  and  Finlfy,  J.  H.     Taxation  in  American  Slates  and 

Cities.     N.  Y.,  1888. 
GoscHEN,   G.   J.     Reports  and  Speeches  on  Local  Taxes.     Mac- 
millan and  Co.,  1872. 
HoBSON,  J.  A.     Taxation  in  the  New  State.     N.  Y.,  1920. 
Hock,  C.  F.  von.     Finanzen  und  die  Finanzgeschichte  der  Verein 

igten  Staaten  von  Amcrika.     Stuttgart,  1867. 
Holmes,  Geo.  E.     Federal  Income  Tax,  War  Profits    and  Excess 

Profits  Taxes.     Indianapolis,  1920. 
Leroy-Beaulieu,  V.     Traite  de  la  Science  des  Finances.     61  h  ed. 

Paris,  1899. 
Marzano,  F.     Comi)cndio  di  scienza  dellc  linanze.     2d  ed.  Turin, 

1887. 

435 


436  BRIEF   BIBLIOGRAPHY 

McCuLLOCH,  J.  R.  Taxation  and  the  Funding  System.  3d  ed. 
London,  1863. 

Montgomery,  R.  H.     Income  Tax  Procedure.     New  York,  1920. 

Plehn,  C.  C.  Government  Finance  in  the  United  States.  Chicago, 
1915- 

DeParieu,  F.  E.  Traite  des  impots.  5  tomes.  Paris,  1862, 
[First  edition  in  five  volumes  better  than  the  second  in  four, 
1866-7.] 

Rau,  K.  H.  Grundsatze  der  Finanzwissenschaft.  3d  ed.  Heidel- 
berg, 1850. 

RoscHER,  W.  System  der  Finanzwissenschaft.  3ded.,enl.  Stutt- 
gart, 1886.     5th  ed.  revised  by  Gerlach,  1901. 

Say,  L.,  Editor.     Dictionnaire  des  finances.     Paris,  1889-94. 

ScHONBERG,  G.,  Editor.  Handbuch  der  National  Oekonomie, 
3ter  Band.     Tubingen,  4th  ed.,  1897-98. 

ScHANZ,   G.     Finanz  Archiv,  A  periodical.     Stuttgart,  since   1884. 

Schwab,  J.  C.  History  of  the  New  York  Property  Tax.  American 
Economic  Assoc,  1890. 

Seligivian,  E.  R.  A.  Essays  in  Taxation.  The  Macmillan  Co., 
1895. 

Seligman,  E.  R.  a.  Finance  Statistics  of  the  American  Common- 
wealths.    Boston,  American  Statistical  Assoc,  1889. 

Seligman,  E.  R.  A.  The  Income  Tax.  2d.  ed.,  1914.  The  Mac- 
millan Co. 

Seligman,  E.  R.  A.  Progressive  Taxation  in  Theory  and  Practice. 
American  Economic  Assoc,  1894.     Revised  1908. 

Seligman,  E.  R.  A.  Shifting  and  Incidence  of  Taxation.  3d  ed., 
enl.     The  Macmillan  Co.,  1910. 

Stamp,  J.  C.     British  Incomes  and  Property.     London,  1916. 

State  and  Local  Taxation.  Addresses  and  Proceedings  of  the 
Conferences  1907  and  yearly  thereafter,  held  under  the  Auspices 
of  the  National  Tax  Association.  The  Macmillan  Co.,  New 
York. 

Stein,  L.  von.  Lehrbuch  der  Finanzwissenschaft.  5te  Auflage. 
Leipzig,  1885.  J 

ViGNES,  E.     Traite  des  impots  en  France.     2  tomes.     Paris,  1880. 

Wagner,  A.  Finanzwissenschaft.  Leipzig,  Vol.  I,  3d  ed.,  1883 ; 
Vol.  II,  2d  ed.,  1890;  Vol.  Ill,  1889;  Erganzungsheft,  1896; 
Vol.  IV,  1899. 

Wells.     Theory  and  Practice  of  Taxation,  N.  Y.,  1900. 

West,  M.     The  Inheritance  Tax.     Columbia  University,  1908. 

Wilson,  A.  J.  The  National  Budget,  the  National  Debt,  Taxes 
and  Rates.     English  Citizen  Series.     Macmillan  and  Co.,   1882. 


BRIEF   BIBLIOGRAPHY  437 

OTHER   BIBLIOGRAPHIES 

[Most  of  the  larger  treatises  mentioned  above  contain  numerous 
references  and  many  bibliographies.     The  following  lists   of  books 
are  easily  available  for  English  and  American  students.] 
White's  translation  of  Cossa's  Taxation.     Pp.  181-193. 
Bowker  and  lies.     Readers'  Guide  in  Economics,  Social  and  Political 

Science.     Putnam,  1891.     Pp.  66-73. 
Seligman's  Essays  in  Taxation.     Pp.  62,  63,  and  263,  264. 
Stammhammer.     Bibliographic  der  Finanzwissenschaft.     Jena,  1903. 


INDEX 


Abatements,  243,  253,  258. 

Ability  to  pay  taxes,  g2. 

Abnormal  profits,  292. 

Accidents,  industrial,  47. 

Accise,  103  n. 

Accounts,  local,  39s ;  public,  U.  S.,  394. 

Adams,  H.  C,  5,  358. 

Adams,  T.  S.,  5,  132- 

Adcisio,  103  n. 

Administration,  British  income  tax,  261 ; 

fiscal,  377  ;   war  finance,  396. 
Administrative   expenditures,    26;     fees, 

330. 
Ad  valorem,  76;   duties,  150. 
Aide,  55,  105. 
Aliens,  277. 
All  fools'  day,  176. 
Allied  powers,  debts  of,  351-2. 
American  property  tax,  163  fl. ;   tax  sys- 
tem, 128. 
Amortisation,  314. 
Amusement  taxes,  England,  412  ;  France, 

416;  United  States,  423. 
Andrews,  E.  B.,  74  n. 
Anglo-French  Loan,  war,  411,  417. 
Annuities,  237 ;    life,  361 ;    under  U.  S. 

income  tax,  239  n. ;  war,  369. 
Anti-corn-law  league,  153. 
Apportioned  tax,  77. 
Appropriation,  committee  on,  380. 
Aristotle,  11. 
Armorial  bearings,  135. 
Army,  cost  of,  32. 
Assessment:     day,    176;     defined,    81; 

direct    taxes,    388;    income   tax,    268, 

284;    property    tax,    389;    roll,    178; 

special,  51,  332. 
Athens,  15. 

Audit  and  control,  381  S. 
Auditors,  U.  S.,  384. 
Aujwandskuer ,  134. 
Austria,  debt  of,  341,  351,  352;    export 

duties,  145 ;  public  lands,  337  ;  tobacco 

monopoly,  143. 


Back-tax  commissions,  171. 

Bad  debts,  244,  274. 

Bankers'  Trust  Co.,  351. 

Banks   as   custodians   of    public   funds, 

392;   stock,  175. 
Base,  of  tax,  defined,  75. 
Bastable,  5,  7  n.,  13  n.,  18,  70,  144,  203  n., 

251,  334,  340,  343,  376,  379,  382  n. 
Bedes,  55,  loi. 

Beer,  tax  on,  139,  141.     See  Excises. 
Belgium,  debt  of,  341,  351-2. 
Belligerents,  debts  of,  351-2. 
Beneficiaries  under  inheritance  tax,  211. 
Benefit,    common,    9;     special,    9,    10; 

theory,  64,  91. 
Benevolences,  55,  108. 
Bengal,  taxes  in,  317. 
Berlin  and  Milan  decrees,  158. 
Besitz,  71. 

Betterments,  51,  333. 
Bibliography,  5  ;   general,  435. 
Bills,  exchequer,  or  treasurj',  355. 
Black,  270  n. 
Blackstone,  64  n. 
Boeckh,  15  n. 
Boer  war,  34,  371. 
Bonds,    358;    taxability,    362;     United 

States,  360;   war,  403.     See  Debt. 
Bans  de  la  defense  nalionale,  356  ff.,  416. 
Bookkeeping,  public,  392. 
Borrowing  draws  on  future,  404. 
Bounties,  47. 
Bowring,  116. 
Brackets,  299  n. 
British  debt,  342;    excess  profits  duty, 

296    fi. ;     property    and    income    tax, 

250  ff. ;    tax  on  annuities,   238 ;    war 

taxes,  411. 
British  income  tax  rates,  258. 
Bryce,  107  n. 
Budget,  376  fT.;   English,  378;  proposed, 

U.  S.,  386;  war,  British,  410. 
Buildings,  public,  31;  tax,  194. 
Bulgaria,  debt  of,  341,  351-2. 


439 


440 


INDEX 


Bullock,  4  n.,  5,  67  n.,  68  n.,  264. 

Burgess,  11  n.,  137. 

Burnell  and  Hopkins,  4  n. 

Business  affected  by  war,   308;    taxes, 

French,    125;     National    Tax    Ass'n, 

133- 

Ca<fa5;re,  defined,  83,  193.    5ee  Land  tax. 
California,  30;    definition  of  value,  180; 

inheritance  tax,   218,   219;    mortgage 

tax,   130,   183 ;    tax  commission,   185 ; 

taxation  of  improvements,  181. 
Cameralists,  2. 
Canals,  36. 
Candy,  tax  on,  323. 
Canons  of  taxation,  3,  4. 
Capital     distinguished     from     income, 

226  ff. ;      invested,    301 ;      levy,    post 

war,  200;    taxation  of,  197;    waste  in 

war,  405. 
Capitalisation  of  tax,  314. 
Capitation  tax,  220  ff.     See  Poll  tax. 
Carriages,  tax  on,  135. 
Cemeteries  exempt,  178. 
Censors,  377. 

Census  Bureau,  60,  180,  395  n. 
Central    control   of   property    tax,    133, 

169;     powers,    debts   of,    351-2;     tax 

commission,  390. 
Certainty,  canon  of,  3. 
Chancellor  of  Exchequer,  on  budget,  378. 
Charities,  40  ff.     See  Poor  relief. 
China,  debt  of,  341. 
Churches,  exempt,  178;   fees  of,  331. 
Cise,  103  n. 

City  finances,  middle  ages,  102. 
Ci\dl  list,  27. 
Civil  war,  U.  S.,  34 ;   debt,  409 ;   income 

tax,   266;    sinking  fund,  374;    tariff, 

158. 
Claims,  353  ff. ;   court  of,  383. 
Classification,  7. 
Clocks,  135. 
Coffee,  war  tax  on,  427. 
Cohn,  5,  7,  18,  71,  75,  88,  136,  ISO  n.,  345, 

357- 
Colbert,  103. 
Collateral,  heirs,    see    Inheritance    tax; 

loans,  war,  411,  417. 
Collection,  387  ff. 
Colleges,  37,  178. 
Colonial  taxation,  no. 
Commerce,  expenditures  for,  35,  36,  38. 
Commercial  fees,  332. 
Commissions,    back    tax,    171 ;     central 

tax,  133,  169. 


Commissioner,  Internal  Revenue.  284. 

Committee  on  ways  and  means,  380. 

Common  benefit,  19. 

Common-penny,  loi. 

Commonwealth  sinking  funds,  374. 

Commutation  poll  tax,  221. 

Compensation,  workmen's,  46. 

Compensatorj'  theory,  95. 

Comptroller,  U.  S.,  383  ff. 

Compulsion,  58. 

Conflict  of  tax  laws,  216. 

Congress,  29;  and  budget,  379;  powers 
on  income  tax,  262  ff. 

Connecticut,  income  tax,  288;  pro- 
prietors, 92. 

Conrad,  150  n. 

Consols,  360. 

Conspicuous  waste,  war  tax  in  France, 
416. 

Constitution  of  U.  S.  on  income  tax, 
263  ff. ;    i6th  amendment,  265. 

Constitutional  government,  expenditures, 

17- 

Constitutionalism,  56. 

Constitutionality,  of  federal  estate  tax, 
215  ;  of  income  tax,  U.  S.,  263. 

Consular  service,  28. 

Consumption  taxes,  135;   France,  416. 

Contribution  des  patents,  125. 

Contributions  to  charities,  245. 

Control  and  audit,  381  ff. ;  of  purse,  377  ; 
state  boards  of,  386. 

Convenience,  canon  of,  3 ;  of  contribu- 
tor, 390. 

Conversion  of  debt,  368. 

Cooley,  6,  64  n.,  91. 

Corn-law,  152. 

Corporations,  income  tax  on,  246,  269, 
282 ;  personal  service,  281 ;  tax  on 
franchise,  186. 

Corvees,  104. 

Cost,  increasing  of  govenmient,  24;  of 
living  and  excess  profits  tax,  304. 

Costs,  court,  329. 

Court  of  claims,  383. 

Courts,  50. 

Credit,  defined,  340  ff.,  343 ;  of  U.  S.  in 
Spanish  war ;   war  general,  398  2. 

Credits,  184;  income  tax,  274. 

Criminals,  43. 

Crop  exemptions,  176. 

Custody  of  funds,  391. 

Customs,  81,  107,  134,  144  ff.;  collec- 
tions, 387  ;  EngUsh,  151 ;  in  war,  Eng- 
land, 412;  union,  German,  154.  See 
Protection,  Tariffs  and  Countries. 


INDEX 


441 


Danegeld,  105. 

Daniels,  5,  184. 

Date  ot  assessment,  176. 

Dealers,  incidence  of  tax  on,  320. 

Death  duties,  202  ff. ;  British,  205.     Sec 

Inheritance  tax,  Estate  tax. 
Debt,    effect    of,    340;      floating,    356; 

forms  of,   353S. ;   funded,   356,   35S; 

perpetual,   350  ;     public,   340  ff. ;    size 

of,  340 ;  war,  U.  S.,  424.    See  War,  and 

Countries. 
Declaration,  tax  payers,   171,  389.     See 

Return,  also  British  income  tax. 
Decrease  in  property  value,  237. 
Deductions  under  income  tax,  274. 
Defects  of  U.  S.  income  tax,  285. 
Defence,  cost  of,  31. 
Defence  loans,  France,  416  ff. 
Deficiency  appropriations,  381. 
Deficit  financing,  343. 
Degressive  tax  rate,  78,  245,  268. 
Delaware    income    tax,    288;     property 

value,  179. 
Denmark,  debt  of,  341. 
Depletion,  245. 
Depreciation,  237. 
Derivative  revenues,  61. 
Dewey,  5. 
Diagrams  of  tax  rates,  78,   79,  80;    of 

U.  S.  income  tax,  279. 
Dimes,  103. 

Dingley,  tariff,  160;   Chairman,  427. 
Diplomatic  service,  28. 
Direct  taxes,  67,  312. 
Disbursing  ofScers,  U.  S.,  385. 
Dividends  under  income  tax,  247,  275 ; 

mining,  239. 
Dog  tax,  135. 
Dona,  55. 

Doomsday  book  of  land  tax,  196. 
Douglas,  III  n. 
Dowell,  105,  151  n. 
"Drive"  for  loans,  366,  406. 
Duties,  ad  valorem,  150;   specific,  150. 

Early  taxes,  American,  no. 

Earned  income,  sec  Income  and  Income 

tax. 
Economist,  London,  411. 
Economy,  canon  of,  4. 
Edgcworth,  6,  65  n.,  95  n. 
Education,  cost  of,  36  ff. 
Educational  fees,  330. 
Effects  and  incidence,  3 10  ff . 
Ehcberg,  5. 
Eisner  w.  Macombcr,  271  n. 


Ely,  57  n. 

Embargo  and  Non-intercourse  Acts,  158. 

England,  early  taxes,  105;    excises,  139; 

old  age  pensions,  42  ;  tax  reform,  127; 

war    debts,  341,  351-2;   war  finance, 

410. 
Equalisation,  169,  390. 
Equality,  canon  of,  3. 
Errors  in  British  war  finance,  414. 
Erwerh,  71. 
Estate,  meaning  of  term,  204 ;  tax,  202  ff . ; 

unconstitutional,  215. 
Estimates,  English,  378. 
Excess    profits    tax,     291  ff.;      British, 

296  ff.,  412;   U.  S.,  297. 
Exchanges,  38. 
Exchequer  bills,  355. 
E.xcise,  81,  103  n.,  134  ff-,  141;    British, 

139;  collection,  388;  U.  S.,  140;  war, 

England,  412;  war,  U.  S.,  423,  426. 
Exemptions,    bonds,    362 ;     income    tax, 

242,  275,  281  n. ;    property  tax,  177. 
Exhaustion,  274. 
Expansion  of  state,  12. 
Expenditures,  17  ff.;  administrative,  26; 

early,  14;   growth  of,  22  ff.;    net,  26. 
Expenses,  under  income  tax,   240,   243, 

275- 
Exports,  tax  on,  144. 
Extraordinary  expenses  of  war,  396. 

Extravagance,  24. 


Faculty  theory,  65,  91. 

Farmer,  tax,  387. 

Federalist,  373. 

Federal  Reserve  system  in  War,  422. 

Fees,  59,  71,  328  ff.;   administrative,  72, 

330;   church,   331;    commercial,  332; 

educational,   330;    legal,    71;    postal, 

334- 

Feudal  expenditures,  16;   revenues,  99. 

Field,  Justice,  265. 

Fifteenths,  107. 

Fillebrown,  86. 

Finance,  defined,  i. 

Fines,  63. 

Fisher,  226  n.,  227. 

Fiske,  81,  1O7  n. 

Floating  debts,  356. 

Folwell,  147  n. 

Foreigner  pays  tariff,  149. 

Forests,  337. 

France,  debt  of,  341,  351-2;  frequent 
deficits,  415;  tariff,  155;  taxes  in, 
102,  122;   war  finance,  415  ff. 


442 


INDEX 


Franchises,    corporate,    i86  fif. ;     N.   Y., 

177. 
Free  trade,  49;   countries,  147. 
Fumage,  105. 

Funded  income,  233 ;  debts,  356,  358. 
Funds,  public,  moving,  391. 
"Funds,"  the,  394. 

Gabelle,  105,  137. 

Gage,  Secretary,  425,  434. 

Gains  as  income,  234. 

Gallatin,  373. 

Gardner,  395  n. 

Geffcken,  36. 

General  property  tax,  163  ff.,  189. 

George,  Henry,  85. 

George,  Lloyd,  195,  293. 

Germany,    debt    of,    341,    351-2;     war 

finance,  405,  418.  See  Prussia. 
Gifts,  63;  under  income  tax,  272. 
Gladstone,  233. 

Glass,  secretary  of  treasury,  308. 
Gobelin,  tapestry,  60,  338. 
Gold  mining,  298. 
Goodnovv,  51. 
Good  will,  188. 
Goschen,  6. 
Gottlieb,  351. 
Great  Britain,  debt  of,  341,  351-2,  369; 

war  finance  theory,  405.     See  British, 

England. 
Greece,  debt  of,  341,  351-2. 
Gross  income,  274. 
Gross  receipts,  tax  on,  324. 
Gross  sales,  tax  on,  327. 

Hadley,  74  n. 

Hague,  31. 

Haig,  5. 

Hair  powder,  135. 

Hall,  151  n. 

Hamilton,  A.,  373,  382. 

Hamilton,  R.,  sinking  fund,  371. 

Hearth  tax,  105. 

Heirs  under  inheritance  tax,  210. 

Higgs,  67  n. 

Hill,  248. 

Hoffman,  7  n. 

Holder,  bonds  payable  to,  368. 

Hollander,  5. 

Holmes,  270  n. 

Hospitals,  43 ; 

Houses,  135. 

Howe,  268  n. 

Human  welfare,  53. 

Hungary,  debt  of.  341,  351- 


poll  tax  for,  221. 


Imports,  tax  on,  144.     See  Customs. 

Impost  defined,  81. 

Impot  des  palentes,  123. 

Impot  fonder,  123,  192. 

Improvements  on  real  estate,  181. 

Incidence  defined,  81 ;  general,  310  U. 

Incisio,  103  n. 

Incisura,  103  n. 

Income,  69,  224  fl. ;  earned,  233;  gross, 
242 ;  funded,  233 ;  incidence  of  tax 
on,  320;  net,  242;  realized,  273; 
types,  240. 

Income  tax,  223  ff. ;  England:  79,  109, 
240  ff.,  412  ff. ;  administration  in, 
261;  commissioners,  262;  France,  415; 
Prussia,  80,  119,  248  ff. ;  U.  S. :  history, 
262  ff.;  civil  war,  267  ff. ;  1894,  269; 
recent,  270;  on  corporations,  246. 

Increment  in  property  value,  235. 

Increment  value  land  tax,  87,  194. 

Indebtedness,  public,  340  ff. 

India,  export  duties,  145. 

Indiana,  property  tax  in,  168. 

Indirect  taxes,  67;   shifted,  311. 

Individualism,  11. 

Industrial  accidents,  47. 

Industrial  earnings,  328  ff.,  335,  338. 

Industries,  state,  52. 

Inequalities  of  valuation,  181. 

Inequality  of  excess  profits  tax,  306. 

Infant  industries,  48. 

Inflation,  293,  303,  401 ;  war,  France, 
416;   U.  S.,  422. 

Information  at  source,  283. 

Inheritance  taxes,  68,  202  ff. ;  adminis- 
tration, 217;  arguments  pro  and  con, 
209;   U.  S.,  207,  214  ff.;   rates,  210. 

Inquisitors,  tax,  171. 

Insane,  43. 

Insurance,  42 ;  against  inheritance  tax, 
212  ;   war,  45. 

Intangibles,  184  ft". 

Interest,  taxes  on,  70,  313;  on  loans, 
plan  of  payment,  367  ;  on  loans,  363 ; 
on  war  loans,  407. 

Internal  taxes,  Spanish  war,  428. 

Interstate  conflict  of  tax  laws,  216. 

Invested  capital,  301. 

Invested  debts,  364. 

Italy,  debt  of,  341,  351-2. 

Japan,  debt  of,  341. 
Johnson,  368. 
Judicial  fees,  329. 
Judiciary  expenses,  30. 
Judson,  6. 


INDEX 


443 


Justice,  administration  of,  50;  in  taxa- 
tion, 56,  8g. 

Kandtorowicz,  150  n. 

Kennan,  268  n. 

Kerbe,  103  n. 

Kidd,  II  n. 

Kinley,  392. 

Knies,  344. 

Knowlton  vs.  Moore,  205,  215. 

Land  tax,  192;  commissioners,  British, 
261. 

Lands,  public,  336. 

Law,  Bonar,  413. 

Laws  of  Manu,  4  n. 

League  of  Nations,  31. 

Leave-them-as-you-find-them,  95. 

Legacy  duty,  206. 

Legal  fees,  329. 

Legislative  expenses,  29,  30;  control  of 
purse,  377- 

Legoyt,  116  n. 

Lender,  marginal,  406. 

Leroy  Beaulieu,  5,  123. 

Levasseur,  156  n. 

Levy,  tax  defined,  81. 

Lev>',  152  n. 

Lexis,  150  n. 

License,  138. 

Lighting,  street,  25. 

Liquor  taxes,  139,  140. 

List,  F.,  48. 

List,  tax,  82. 

Loans,  see  Debt;  bureau,  Germany, 
418;  foreign  and  domestic,  349; 
negotiation,  366;  popular,  406;  pro- 
ductive, 364;  secured,  363;  Spanish 
war,  430;  vs.  taxes  for  war,  400  fi.; 
war,  351-2,  410. 

Local  taxation,  English,  109. 

Losses,  237,  244,  274. 

Lottery  loans,  361. 

Luxury,  135  ;   taxes,  416,  423. 

McCuUoch,  5,  97,  152  n. 

M'CuUoch  vs.  Md.,  266. 

McKenna,  411,  412,  414. 

McKinley  tariff,  159- 

McLeod,  344. 

Magna  Carta,  64  n. 

Maine,  55  n. 

Maine,  destruction  of,  425. 

Malchus,  7  n. 

Malthus,  40. 

Manu,  maxim,  4,  223. 


Markets,  38. 

Marquardt,  15  n. 

Marshall,  Chief  Justice,  266. 

Marshall,  6,  74  n. 

Maryland  rental  values,  179. 

Masons,  178. 

Massachusetts  income  tax,  288;   tax  on 

annuities,  238. 
Measure  of  taxation,  64. 
Michigan,  property  tax  in,  169. 
Military,  cost  of,  32. 
Milk,  tax  on,  324. 
Mill,  J.  S.,  42s. 
Millis,  203  n. 
Mineral  rights  duty,  igs- 
Mines,  337. 

Mining  dividends,  239. 
Missouri  income  tax,  288. 
Model  tax  system,  N.  T.  A.,  132, 
Money,  184. 
MonopoUes,  public,  73. 
Montgomery,  270  n.,  271  n. 
Moratoria,  409. 
Morrill  tariff,  158. 
Mortgages,    taxation    of,     130,     182  ff., 

198,  254. 
Mothers'  pensions,  41. 
Munitions  tax,  U.  S.,  423. 

National  Tax  Assn.,  5 ;  model  tax  sys- 
tem, 132. 

Navigation,  36. 

Navy,  cost  of,  33. 

Nebenius,  344. 

Negotiating  a  loan,  366. 

Nelson,  270  n. 

Netherlands,  debt  of,  341. 

New  England,  early  taxes,  1 1 1 ;  property 
tax  in,  167. 

New  Jersey,  rental  values,  179. 

New  Mexico,  income  tax,  288. 

New  York,  income  tax,  280,  289;  prop- 
erty tax  in,  165,  181. 

Nicholson,  7  n.,  66  n. 

Non-residents,  277. 

Normal  profits,  292,  302. 

North  Dakota  income  tax,  288. 

Norway,  debt  of,  351. 

Obligations  de  la  defense  nationale,  365, 

416. 
Obsolescence,  237,  244,  274. 
Occasion,    increment    value    tax,     196; 

inheritance  tax,  212. 
Octrois,  los,  138. 
Odd  EuUows,  178. 


444 


INDEX 


Ohio,  tax  inquisitors,  171. 
Oklahoma,  income  tax,  288. 
Old  age  pensions,  42. 
Oleomargarine,  141. 
Opium,  tax  on,  141. 
Orphans,  41  ff. 

Pacific    Coast,    property    tax    on,    172; 

railroads,  430. 
Panics,  war,  4og. 
Paper  money,  353. 
Parieu,  de,  5,  104  n. 
Parliament,  29;   on  budget,  378. 
Payment  of  debts  necessary,  369. 
Payne  tariff,  161. 
Pennsylvania,  rental  values,  179. 
Pensions,    42,    44;     mothers',    41;     as 

annuities,  238. 
Perpetual  debts,  359. 
Personal    expenses,    income    tax,     275 ; 

property,    130;     service   corporations, 

281. 
Personalty,  181. 
Personnelle  et  mohiliere,  123. 
Persons,  taxes  on,  69. 
PelUiones,  55. 
Philippines,  145. 
Physiocrats,  67,  85. 
Pitt,  sinking  funds,  370. 
Plate,  135- 
Playing  cards,  141. 
Plehn,  7  n.,  197. 
Poll  tax,  220  ff.,  312. 
Poor-rate,  English,  58. 
Poor  relief,  40  ff. 
Popular  loans,  366,  406;    German,  419, 

U.  S.  Spanish  war,  432.     See  War  and 

Debts. 
Porks  etfe nitres,  123. 
Portugal,  debt  of,  341. 
Possessory  claims,  176. 
Post,  L.  F.,  8s,  87. 
Postal  fees,  334. 
Post  office,  25. 
Post  war  finance,  424. 
Preparedness,  financial,  German,  418. 
Price,  sinking  fund,  370. 
Probate  and  account  duty,  205. 
Producers,  incidence  of  tax  on,  320. 
Profiteering,  401. 

Profits  as  income,  234;   tax  on,  292. 
Progression,  4,  77,  96,  97,  245. 
Property,  174,  176,   228  ff.;    as  capital, 

228  ff. ;    tax,  69,  163  ff. ;   incidence  of, 

314  ff.;    objections  to,  189;    types  of, 

166  ff.;  regeneration  of,  191. 


Protection,  47,  146,  148. 

Prussia   income   tax,    119,    246,    248  ff.; 

railroads,  339;    tax  reforms,  118,  120; 

tax  system,  122. 
Publican,  Roman,  387. 
Public  industries,  335. 
Purse,  control  of,  377. 
Pyramiding,  war  loans,  Germany,  420. 

QucEslors,  377. 
Quarantine,  44. 

Railroads,  72  ff.,  338. 

Rates,  defined,  60,  72,  76;  income  tax, 
24s,  276;  local,  109;  U.  S.  war  and 
excess  profits  tax,  300.   See  other  taxes. 

Rau,  5,  27  n.,  67,  344. 

Receipts  as  income,  224. 

Reconstruction,  post  war,  202. 

Reforms  in  taxation,  117. 

Register,  U.  S.,  385. 

Registered  bonds,  368. 

Regressive  tax,  80. 

Relief,  British  income  tax,  253,  258. 

Religion,  23. 

Renick  and  Thompson,  382. 

Rent,  taxes  on,  70,  313. 

Rente,  360,  417.     See  Debts. 

Repairs  to  property,  244. 

Repudiation  of  debt,  424. 

Reserves,  cash,  343. 

Retirement,  pensions,  45. 

Returns,  281 ;   secrecy  of,  283. 

Revenues,  classification,  58;  public,  54  ff. 

Reversion  value  duty,  195. 

Revolution,  U.  S.   debt  of,  373,  409. 

Rhode  Island,  property  tax  in,  168. 

Ricardo,  5,  90. 

Ripley,  iii  n.,  112. 

Rivers  and  harbours,  36. 

Roads,  cost  of,  35. 

Roll,  tax,  82,  178. 

Roman  publican,  387. 

Rome,  15. 

Roscher,  5,  14  n. 

Rosewater,  332,  333. 

Ross,  370  n.,  372. 

Roumania,  debt  of,  341. 

Russia,  debt  of,  341,  351-2,  368;  export 
duties,  145. 

Saladin  tithe,  106. 

Sales  tax,  327. 

Salt  tax,  105,  137,  141. 

Say,  5. 

Schonberg,  5,  67  n.,  102  n. 


INDEX 


445 


Schools,  23,  36;  poll  tax,  221. 

Schwab,  112  n. 

Secrecj'  of  returns,  283. 

Secured  loans,  war,  England,  411; 
France,  417. 

Seeley,  118  n. 

Seligman,  5,  7,  55,  59,  65  n.,  68  n.,  70, 
74  n.,  89  n.,  97,  III  n.,  136,  157,  191, 
199,  203  n.,  264,  268  n.,  315,  395  n. 

Senior,  74  n. 

Servant  girl  as  marginal  lender,  406. 

Servants,  135. 

Servia,  debt  of,  341. 

Sevres  wares,  60,  338. 

Shaw,  37  n. 

Sherwood,  345  n. 

Shifting  defined,  81;  discussed,  310  ff.; 
depends  on  market  conditions,  322. 

Ship-geld,  105. 

Sidgwick,  74  n. 

Silk,  duty  on,  152;  stockings  help  win 
the  war,  402. 

Single  tax,  84  ff. 

Sinking  funds,  370  ff.;  American,  372. 

Sixteenth  Amendment,  U.  S.  Constitu- 
tion, 265. 

Slaughter-houses,  38. 

Smith,  Adam,  canons,  3,  70,  89,  357. 

Smith,  R.  Mayo,  157. 

Smuggling,  151. 

Socialism,  11. 

Sociahstic  theory  of  justice,  95. 

Southern  states,  property  tax  in,  170. 

Spain,  debt  of,  341. 

Spandau,  Julius  Tower,  418. 

Spanish  war,  financing,  425. 

Special  assessments,  51,  72,  332. 

Special  benefits,  19. 

Special  franchises,  N.  Y.,  177. 

Specific  duties,  150;   tax,  76. 

Spottiswood,  III  n. 

Springer  vs.  U.  S.,  68. 

Stamp,  J.  C,  6,  238,  251. 

Stamp  taxes,  war,  U.  S.,  423. 

State,  as  organism,  11. 

State  Boards  of  Control,  386., 

State  income  taxes,  U.  S.,  287. 

Stein,  62,  151,  376. 

Sleuer,  55. 

Stock-dividends,  236. 

Stoppage  at  source,  199,  240,  256. 

Stourm,  376. 

Street  Railway,  tax  on,  324. 

Subtreasuries,  U.  S.,  392  n. 

Sugar,  152;   war  tax  on,  426. 

Sumner,  74  n.,  157. 


Sumptuary  laws,  135. 

Super  taxes,  259,  412  ff. 

Supreme  court,  U.  S.,  271  n.;  on  income 

tax,  264  ff. 
Surtaxes,  277. 
Sweden,  debt  of,  341. 
Switzerland,  debt  of,  341 ;  export  duties, 

145- 
Syndicates  to  buy  loans,  367. 
System,  tax,  84  ff. 

Taille,  103. 

Tallage,  103  n.;  of  groats,  108. 

Tariff,  144  ff.;  commission,  162 ;  France, 
15s ;  U.  S.  Historj-,  157  ;  U.  S.  Spanish 
war,  426. 

Taussig,  157. 

Tax,  defined,  59;  commission,  133,  169, 
390;  inquisitors,  171;  system,  128, 
129,  247;  vs.  loans,  400  ff.  See  more 
specific  terms. 

Taxpayers,  classes,  279. 

Tea,  war  tax  on,  427. 

Telegraph,  73. 

Telephone,  73. 

Tenths,  107. 

Tithe,  Jewish,  223. 

Tobacco  monopoly,  142 ;  tax,  140 ; 
France,  73. 

Toll,  defined,  81. 

Transfers  in  public  accounts,  393. 

Transit  duties,  144. 

Transportation  taxes,  war,  U.  S.,  423. 

Treasuries,  branch,  391. 

Treasury'  bills,  355. 

Turkey,  145;  debt  of,  341,  3S1-2;  ex- 
port duties,  145. 

Types  of  property  tax,  166. 

Undeveloped  land  duty,  195. 

Unfunded  income,  233. 

United  Kingdom,  debt  of,  341. 

United  States  control  and  audit,  382 ; 
debt,  341,  342,  351-2;  excise  taxes, 
140;  income  tax,  246,  262  ff. ;  dia- 
gram, 279;  tariff,  157  S-;  war  finance 
405,  421  ff.     See  more  specific  terms. 

Universities,  37. 

Unpreparedness,  financial,  for  war,  U.  S. 
421. 

Vagrancy,  41. 

Valuation,  defined,  82,  179. 

Value,  full  cash,  180. 

Vcrhrauch,  71. 

Vermont  tax  list,  93,  165. 


446 


INDEX 


Vignes,  103  n. 
Vingliemes,  103. 
Virginia,  early  taxes,  112. 
Voluntary  revenues,  55. 
Von  llociv,  268  n. 
Votes  of  credit,  war,  410. 


Wages,  taxes  on,  70,  313. 

Wagner,  5,  13  n.,  67^  71,  loi  n.,  122  n., 
248  n.,  358. 

Walker,  iii  n. 

War  and  business,  398;  chest,  German, 
418;  cost  of,  34,  408;  credit  during, 
398  fif.;  debts,  351-2,  424;  1812,  debt, 
373 ;  finance,  396  ff.,  425  B. ;  in- 
evitable, 31  ff. ;  income  tax  {see) ; 
profits  taxes,  291  ff .,  297  ff. ;  risk  in- 
surance, 45 ;  taxes,  397,  411,  415,  421 ; 
world,  34,  351  ff. 

Warrants,  353. 

Wasting  assets,  296. 

Watches,  135. 


Water,  supply,  51 ;  works,  73. 

Wehrbcilrag,  418. 

Welfare,  human,  53. 

West,  203  n.,  207  n. 

West  India  Co.,  112. 

West  Virginia  income  tax,  288. 

Williams,  128  n.,  255,  256,  257. 

Wilson,  6,  34,  152  n.,  251,  379,  382  n.; 

Woodrow,  25,  384. 
Wisconsin  income  tax,  287. 
Withholding,  282. 
Wood,  93  n. 
Wool,  duty  on,  152. 
Woolsey,  31. 

Workmen's  compensation,  46. 
World  war  debts,  351-2;    finance,  400; 

England,  410;  France,  415;  Germany, 

418;  U.  S.,  421. 
Writers  on  finance,  4,  5-6. 

Year,  fiscal,  381 ;  tax,  285. 

Zollverein,  116,  154, 


Printed  in  the  United  States  of  America. 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


AA    000  545  670    2 


li-OS 


